<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 1998
REGISTRATION NO. 333-52871
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
TELEBANC FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6712 13-3759196
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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AILEEN LOPEZ PUGH
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3705
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)
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Copies of communications to:
ELLEN CANAN GRADY, ESQ.
SHAW PITTMAN POTTS & TROWBRIDGE
1501 FARM CREDIT DRIVE
MCLEAN, VIRGINIA 22102
(703) 790-7946
CARTER STRONG, ESQ.
ARENT FOX KINTNER PLOTKIN & KAHN, PLLC
1050 CONNECTICUT AVENUE
WASHINGTON, D.C. 20036
(202) 857-6252
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE(1)
- ---------------------------------------------------------------------------------------------------------------
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Common stock, par value
$.01 per share......... 4,100,000 $14.50 $59,450,000 $17,538
===============================================================================================================
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(1) The registration fee has been calculated on the basis of the maximum
aggregate offering price of the securities being offered. The Company has
previously paid $11,800 of this fee and in accordance with Rule 457(a) the
remainder of $5,738 is paid herewith.
THE REGISTRANT HEREBY AMENDS 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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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement relates to the offering (the "Offering") by
TeleBanc Financial Corporation ("the Company") of 4,100,000 shares of common
stock, par value $.01 per share (the "Common Stock"), to the public, and an
additional 615,000 shares of Common Stock issuable upon the exercise of an
over-allotment option granted by the Company to the underwriters of the
Offering.
In addition, the Company has filed a Registration Statement substantially
simultaneously herewith relating to the offering to the public of $25.0 million
% Beneficial Unsecured Securities, Series A by TeleBanc Capital Trust II, a
new statutory business trust formed under the laws of Delaware by the Company.
The Company is the owner of all of the beneficial ownership interests
represented by common securities of such trust.
<PAGE> 3
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.
SUBJECT TO COMPLETION, DATED JUNE 22, 1998
[TELEBANK LOGO]
4,100,000 SHARES
COMMON STOCK
All of the 4,100,000 shares of common stock, par value $.01 per share
("Common Stock"), offered hereby (the "Offering") are being sold by TeleBanc
Financial Corporation (the "Company"), the holding company of TeleBank, a
federally chartered savings bank ("TeleBank"). The Common Stock has been traded
over-the-counter under the symbol "TBFC" since May 1994. Prior to the Offering,
there has been a limited public market for the Common Stock. See "Risk
Factors -- Marketability of Common Stock." It is currently expected that the
offering price of the Common Stock offered hereby will be between $12.50 and
$14.50 per share. For information relating to the determination of the offering
price, see "Determination of Offering Price" and "Underwriting." The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "TBFC," subject to notice of issuance. On June 18, 1998, the last
reported sale price of the Common Stock was $10.13 per share.
Simultaneously with the Offering, TeleBanc Capital Trust II ("TCT II"), a
newly formed Delaware business trust beneficially owned by the Company, is
offering to the public (the "BLUS(SM) Offering") $25.0 million % Beneficial
Unsecured Securities, Series A (the "BLUS(SM)").
------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------------
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. THESE
SECURITIES ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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- ------------------------------------------------------------------------------------------------------------------
Per Share.................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting Offering expenses payable by the Company estimated at
$625,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 615,000 shares of Common Stock to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco, California
on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER
LEGG MASON WOOD WALKER
INCORPORATED
The date of this Prospectus is , 1998
<PAGE> 4
[GRAPHICS: THE FRONT COVER OF THE GATEFOLD SHOWS AN ADVERTISEMENT OF THE
COMPANY. IT IS A PHOTOGRAPH OF THE TAJ MAHAL WITH THE COMPANY'S TELEPHONE NUMBER
AND WEB SITE ADDRESS AT THE BOTTOM. AT THE TOP OF THE PHOTOGRAPH READS "BUILDING
THE BRAND. SURE, WE COULD BUILD EXPENSIVE BRANCHES. (BUT, WE FIGURED YOU'D
RATHER JUST HAVE THE MONEY.") INSIDE THE GATEFOLD IS BACKGROUND MAP OF THE
UNITED STATES UPON WHICH IS SUPERIMPOSED THE PRODUCTS AND PROPOSED PRODUCTS OF
THE COMPANY. THE PRODUCTS ARE LISTED IN A COLUMN ON THE LEFT SIDE OF THE
GATEFOLD (CDS, MONEY MARKET ACCOUNTS, CHECKING ACCOUNTS, ANNUITIES, CREDIT
CARDS, RESIDENTIAL MORTGAGE LOANS AND MUTUAL FUNDS) WITH EACH PRODUCT IN ITS OWN
CIRCLE; IN THE SECOND COLUMN IS THE COMPANY'S LOGO; IN THE THIRD COLUMN ARE THE
VARIOUS ALTERNATIVE DELIVERY CHANNELS THROUGH WHICH CUSTOMERS CAN ACCESS THE
COMPANY'S PRODUCTS AND SERVICES; IN THE FOURTH COLUMN IS A PHOTOGRAPH OF A GROUP
OF PEOPLE REPRESENTING CUSTOMERS. ARROWS POINT FROM THE LIST OF PRODUCTS, THE
ALTERNATIVE DELIVERY CHANNELS AND THE PHOTOGRAPH OF THE CUSTOMERS TO THE
COMPANY'S LOGO.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 5
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER TO
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
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PAGE
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The Company................................................. 3
Recent Development.......................................... 3
Prospectus Summary.......................................... 4
Summary Consolidated Financial Data......................... 5
Risk Factors................................................ 6
Use of Proceeds............................................. 13
Dilution.................................................... 13
Determination of Offering Price............................. 14
Price Range of Common Stock................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Selected Pro Forma Condensed Consolidated Statement of
Financial Condition and Statements of Operations.......... 16
Selected Consolidated Financial and Other Data.............. 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 32
Management.................................................. 47
Principal Stockholders...................................... 58
Description of Securities................................... 61
Shares Eligible for Future Sale............................. 67
Underwriting................................................ 69
Legal Matters............................................... 70
Experts..................................................... 70
Incorporation of Certain Documents by Reference............. 70
Available Information....................................... 71
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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THE COMPANY
TeleBanc Financial Corporation ("TeleBanc Financial") was organized under
the laws of the State of Delaware in January 1994 as a savings and loan holding
company. TeleBanc Financial operates its business principally through two wholly
owned subsidiaries, TeleBank and TeleBanc Capital Markets, Inc. ("TCM").
TeleBank offers savings and investment products insured up to applicable limits
by the Federal Deposit Insurance Corporation (the "FDIC"), and TCM is a
registered broker-dealer and investment advisor specializing in mortgage-backed
securities and mortgage loans, that manages the portfolios of TeleBanc Financial
and TeleBank. In addition, TeleBanc Servicing Corporation ("TSC"), a wholly
owned subsidiary of TeleBank, has invested in a joint venture engaged in the
acquisition and collection of delinquent consumer loans for its own portfolio.
The Company has formed another wholly owned subsidiary, TeleBanc Insurance
Services, Inc. ("TeleBanc Insurance"), through which it intends to offer
co-branded insurance products. Unless the context indicates otherwise,
references herein to the Company include TeleBanc Financial and all of its
subsidiaries, references to TeleBanc Financial refer to TeleBanc Financial
Corporation, the holding company, and references to TeleBank refer to TeleBank,
a federally chartered savings bank.
RECENT DEVELOPMENT
Consistent with the Company's direct marketing operating strategy, the
Company has signed an agreement to acquire Direct Financial Corporation ("DFC"),
a regional savings and loan holding company, and its wholly owned subsidiary,
Premium Bank F.S.B., a federal savings bank ("Premium Bank"), in a merger
transaction for approximately $21.4 million in cash and the repayment by the
Company of approximately $6 million in subordinated debt and other liabilities
(the "DFC Acquisition"). DFC employs a direct marketing strategy similar to that
of the Company. At December 31, 1997, DFC reported total assets of $326.1
million, total deposits of $273.9 million, total stockholders' equity of $12.3
million and approximately 15,000 customer accounts. Although there can be no
assurance, the DFC Acquisition is expected to be completed in the summer of
1998, subject to certain conditions, including receipt of regulatory approval.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements, including the Notes thereto, included elsewhere in this
Prospectus. The information presented in this Prospectus (i) reflects a 100%
stock dividend paid by the Company to holders of record of the Common Stock on
June 22, 1998 by the Company, and (ii) assumes the Underwriters' over-allotment
option is not exercised. See "Description of Securities," "Underwriting," and
Note 2 to the Consolidated Financial Statements.
THE COMPANY
The Company is a leading national provider of high value savings,
investment and other financial products and services. The Company utilizes a
branchless banking strategy to offer financial products and services to
customers nationwide and to maintain its low cost structure through the use of
alternative delivery channels, such as telephones, the Internet, automated
teller machines ("ATMs"), facsimile and mail. The Company's broad selection of
high value savings and investment products generally have higher interest rates
or carry lower fees than similar products offered by traditional, branch-based
financial institutions. The Company also emphasizes high quality customer
service and provides customers with "anywhere, anytime" convenience for
accessing its financial products and services. The Company intends to broaden
its financial products and services to include in 1998 annuities, residential
mortgage loans, credit cards and mutual funds. At March 31, 1998, the Company
had more than 22,000 customer accounts, $560.6 million in retail deposits and
$1.0 billion in assets.
The financial services industry is the fifth largest in the United States.
In 1997, deposits held in U.S. financial institutions totaled more than $4
trillion and the total assets of such institutions were more than $6 trillion.
The financial services industry is experiencing rapid change, characterized by
the demand for electronic delivery channels for products and services, the
emergence of nationwide, full-service financial institutions and growing price
competition. Increasingly, customers are seeking higher value products, as well
as access to financial services and products through electronic delivery
channels, such as the Internet, telephones, ATMs and facsimile. The use of such
electronic media has grown through the development of network technologies, the
increased use of personal computers in the home and workplace and faster and
less expensive Internet access. According to an April 1998 report by the U.S.
Department of Commerce (the "Commerce Report"), businesses will trade as much as
$300 billion annually over the Internet during the next five years. Although
Internet banking is still relatively new, the Commerce Report estimated that
approximately 4.5 million households were banking online in 1997, and that
number is expected to increase to 10 to 16 million households by the year 2000.
To meet changing customer demands, the Company has developed a low cost
operating strategy designed to reach potential customers through alternative
delivery channels and to build brand awareness of "TeleBank." As part of this
strategy, through a variety of advertising and promotional media, including
print, the Internet, radio advertising and public relations, the Company targets
customers in all 50 states who seek higher rates, convenience and service. The
Company also has implemented an affinity marketing program, through which it
directly markets its savings and investment products to members of the
participating organizations. Currently, TeleBank has affinity programs with 10
organizations having an aggregate of more than one million members nationwide.
The Company also intends to broaden its financial product and service offerings
by forming strategic alliances with other financial service providers to develop
and market co-branded products. For example, the Company has entered into
agreements with, among others, USG Annuity & Life Company and Jackson National
Life Insurance Company to offer co-branded annuities through the Company's
licensed insurance subsidiary. The Company has entered into agreements with
E-Loan, an Internet-based mortgage loan broker, to offer residential mortgage
loans and with E*Trade to make available electronic brokerage services and
related financial products.
------------------------
The Company's executive offices are located at 1111 North Highland Street,
Arlington, Virginia 22201, telephone (703) 247-3700. The Company's Web site
address is located at www.telebankonline.com.
4
<PAGE> 7
THE OFFERING
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Common Stock offered by the Company................ 4,100,000 shares
Common Stock to be outstanding after the 11,114,448 shares
Offering(1)......................................
Use of Proceeds.................................... The Company intends to use the proceeds of the
Offering to fund the continued growth of the
Company, including its national direct marketing
initiatives, and for working capital and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol............. TBFC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts and other operating data)
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YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------------- ---------------------------------------
PRO FORMA ACTUAL ACTUAL PRO FORMA
1995 1996 1997 1997(2) 1997 1998 1998(2)
--------- --------- --------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Interest income.................. $40,511 $45,800 $59,301 $82,609 $12,837 $18,071 $23,599
Interest expense................. 31,946 34,815 46,063 64,494 9,878 14,477 19,045
--------- --------- --------- ------- --------- --------- ----------
Net interest income.............. 8,565 10,985 13,238 18,115 2,959 3,594 4,554
Non-interest income.............. 3,777 2,756 4,093 7,248 618 1,947 2,175
Non-interest expense............. 6,240 9,075 10,142 14,864 2,105 4,204 5,212
Net income available to common
stockholders................... 2,720 2,552 3,671 5,874 814 274 311
Earnings per share:
Basic........................ $0.66 $0.62 $0.84 $1.34 $0.19 $0.06 $0.07
Diluted...................... 0.66 0.58 0.57 0.89 0.15 0.05 0.05
Weighted average shares:
Basic........................ 4,099 4,099 4,383 4,393 4,212 4,468 4,478
Diluted...................... 4,104 4,406 7,411 7,421 5,790 5,757 5,767
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DECEMBER 31, MARCH 31, 1998
-------------------------------- --------------------------
1995 1996 1997 ACTUAL PRO FORMA(2)
-------- -------- ---------- ----------- ------------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF FINANCIAL CONDITION DATA:
Total assets............................................. $553,943 $647,965 $1,100,352 $1,048,153 $1,373,847
Loans receivable and mortgage-backed securities.......... 482,877 536,564 859,907 817,209 1,024,812
Investment securities.................................... 40,058 78,826 91,237 123,963 161,477
Retail deposits.......................................... 306,500 390,486 522,221 560,554 849,285
Brokered callable certificates of deposit................ -- -- -- 42,286 42,286
Borrowings(3)............................................ 225,878 232,821 522,735 389,247 426,110
Trust preferred securities(4)............................ -- -- 9,572 9,526 9,526
Total stockholders' equity............................... 21,565 24,658 45,824 46,540 46,640
OTHER OPERATING DATA(5):
Number of accounts....................................... 12,919 16,506 21,817 22,916 37,916
Customers with two or more accounts...................... 28% 31% 30% 31% (6)
Accounts referred by or cross-sold to existing
customers.............................................. 25% 27% 38% 50% (6)
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(1) Includes 2,399,486 shares of Common Stock issuable upon conversion of the
Company's outstanding preferred stock, and 119,974 shares of Common Stock
issuable as a dividend on the outstanding preferred stock. Excludes (i)
1,086,176 shares of Common Stock issuable upon the exercise of outstanding
warrants with a weighted average exercise price of $4.17 per share, (ii)
794,794 shares of Common Stock issuable upon the exercise of options granted
to David A. Smilow and Mitchell H. Caplan with a weighted average exercise
price of $4.96 per share, and (iii) 850,402 shares of Common Stock issuable
upon the exercise of options granted to other employees of the Company with
a weighted average exercise price of $7.33 per share. See "Management" and
"Description of Securities."
(2) The Pro Forma Statement of Operations Data and Pro Forma Statement of
Financial Condition Data give pro forma effect to the MET Holdings
Transaction, which is described below under "Capitalization," and the DFC
Acquisition. The Pro Forma Statement of Operations data gives pro forma
effect to the above-mentioned transactions as if they had occurred on
January 1, 1997 for the year ended December 31, 1997, and on January 1, 1998
for the three months ended March 31, 1998. The Pro Forma Statement of
Financial Condition Data gives effect to the above-mentioned transactions as
if they had occurred on March 31, 1998. See "Selected Pro Forma Condensed
Consolidated Statement of Financial Condition and Statement of Operations."
(3) Consists of advances from the Federal Home Loan Bank ("FHLB") of Atlanta,
securities sold under agreements to repurchase, subordinated debt, net and
other liabilities.
(4) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TeleBanc Capital Trust I ("TCT
I"), which was formed to issue such securities and invest the net proceeds
in 11.0% Junior Subordinated Deferrable Interest Debentures, Series A (the
"TCT I Junior Subordinated Debentures"). See Note 12 to Consolidated
Financial Statements.
(5) The Other Operating Data has been derived from the Company's records.
Account data giving pro forma effect to the DFC Acquisition includes account
data for DFC that is approximate.
(6) Data giving pro forma effect to the DFC Acquisition is not available as of
the date of this Prospectus.
5
<PAGE> 8
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby.
Information contained in this Prospectus contains forward-looking statements
which are subject to risks and uncertainties. When used anywhere in this
Prospectus, the words "anticipate," "believe," "could," "estimate," "expect,"
"may," "will," "should" or the negative thereof and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results could differ materially
from those discussed in this Prospectus. Factors that could contribute to such
differences include, but are not limited to, those discussed in this section and
in sections entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as those discussed
elsewhere in this Prospectus.
INTEREST RATE RISK
The results of operations of the Company substantially depend upon the
level of the Company's net interest income, which is the difference between
interest income from interest-earning assets (such as loans and mortgage-backed
securities) and interest expense on interest-bearing liabilities (such as
deposits and borrowings). Interest rates are highly sensitive to many factors
beyond the Company's control, including governmental monetary policies, domestic
and international economic and political conditions and other factors. If
interest rate fluctuations cause TeleBank's cost of funds to increase faster
than the yield on the interest-bearing assets of TeleBank, its net interest
income will be reduced.
The market value of most of the Company's financial assets also is
sensitive to fluctuations in market interest rates. Fixed-rate investments,
mortgage-backed and related securities and mortgage loans generally decline in
value as interest rates rise. Based on TeleBank's March 31, 1998 simulation
analysis, and excluding TeleBank's trading portfolio, the Company estimates that
a hypothetical instantaneous 100-basis point rise in rates would cause the fair
value of TeleBank's stockholder's equity (the "FVE") to decrease by 8.6%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's net interest income, margins and results of operations have
fluctuated in the past and are expected to continue to fluctuate in the future,
on an annual and quarterly basis, as a result of several factors. Such factors
include fluctuating interest rates, changes in non-interest income, economic
factors, the performance of the Company's loan portfolio and other
interest-earning assets, the Company's level of marketing expenditures,
introduction of new products by the Company or by its competitors, the changing
mix of products and services sold and the effectiveness of the Company's
customer service. For the foregoing reasons, the Company believes that quarter
to quarter comparisons of the Company's results of operations are not
necessarily meaningful and that the Company's results of operations in any
particular quarter should not be relied upon as indicative of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEVELOPMENT OF BRAND AWARENESS
The Company believes that the importance of brand recognition will increase
as more companies engage in commerce over the Internet and through other
nontraditional commercial means. The Company's success in introducing new
financial products and services through alternative delivery channels will
depend in part upon the Company's ability to increase brand awareness of the
name "TeleBank." There can be no assurance that the Company will be able to
develop effectively an association between the brand name "TeleBank" and the
financial products and services it provides, or that, if successful, such
association will have a material favorable effect on the Company's business,
financial condition and results of operations. The Company anticipates that its
efforts to develop and, if developed, maintain brand awareness will increase
marketing and related costs significantly. These significant additional expenses
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company currently does not own a
6
<PAGE> 9
federal registration for the servicemark "TeleBank." If the Company is
successful in developing a branded identity for "TeleBank" and a competitor were
to challenge successfully the Company's ability to use the name TeleBank, it
could have a material adverse effect on the Company's business, financial
condition and results of operation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
MANAGEMENT OF GROWTH
Since 1996, the Company has experienced rapid growth and anticipates that
it will continue to do so in the future. The Company's ability, however, to
maintain continued growth depends to a significant degree on numerous factors,
including: (i) the Company's ability to maintain high value products and
services; (ii) the extent to which the Company increases its existing customer
base and attracts new customers; (iii) the Company's ability to recruit, train,
motivate and retain qualified personnel, including customer service
representatives and marketing and sales personnel; (iv) the Company's ability to
raise additional capital for operational and regulatory capital requirements;
and (v) the Company's ability to build enhanced operating and financial systems
and to attract the additional management required to manage effectively such
growth. Also, the Office of Thrift Supervision ("OTS") has the authority to
restrict asset growth by TeleBank based on safety and soundness considerations.
There can be no assurance that, if rapid growth continues, the Company will be
able to manage such growth effectively. The inability of the Company to manage
growth effectively could have a material adverse effect on its business,
financial condition and results of operations.
DEPENDENCE ON NEW PRODUCTS AND SERVICES
The Company's growth will depend in part upon the ability of the Company to
offer new financial products and services that satisfy changing consumer
demands. Through TeleBank, the Company currently offers FDIC-insured checking
accounts, money market accounts, savings accounts and certificates of deposit
("CDs"). In 1998, the Company intends to offer credit cards and, through
strategic alliances with third party providers, annuities, residential mortgage
loans and mutual funds. There can be no assurance that the Company will be
successful in offering new financial products and services or in its efforts to
enter into strategic alliances with other companies to offer co-branded products
and services. Further, if offered by the Company, there can be no assurance that
customers will accept any new financial products and services. In addition, the
Company's ability to develop and offer new products or services may be subject
to regulatory limitations.
CUSTOMER ACCEPTANCE OF ALTERNATIVE DELIVERY CHANNELS
The Company's branchless banking strategy differs from that of traditional
financial institutions and relies on alternative delivery channels such as the
telephone, the Internet, ATMs, facsimile and mail to market the Company's
financial products and services. The success of the Company's strategy will
depend, in substantial part, upon customer acceptance of these means of
marketing and delivering financial products and services. The market for
financial products and services through alternative delivery channels is new and
evolving, and the degree to which customers will utilize such channels for their
financial transactions is not yet fully determined. For example, many potential
customers have only limited experience with the Internet as a communications
medium, and even less experience with it as their primary method of banking.
There can be no assurance that customers will be persuaded to conduct banking
and other financial transactions through such alternative channels, and if so
persuaded, that they will find that such alternative channels effectively meet
their demands.
RELIANCE ON THIRD PARTY SERVICE PROVIDERS
The Company receives essential technical and customer service support from
third party providers, including M&I Data Services, Inc. and Security First
Technologies. Such outsourced functions include check processing, check imaging,
Internet processing, Internet software, home page hosting and statement
rendering. The Company's agreements with each of these service providers may be
terminated without cause by either party upon specified notice periods. If the
Company's agreement with one of its third party service providers is
7
<PAGE> 10
terminated, and the Company is unable to replace the provider, its operations
would be interrupted. Any such prolonged interruption could have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION
The Company believes that the principal competitive factors in the
financial services industry in which it operates are price (e.g., interest rates
paid on savings products and fees associated with investment products), service,
convenience and product quality. Although the Company believes its operating
strategy enables it to offer competitive financial products on a nationwide
basis, there can be no assurance that the Company will be able to differentiate
its products from the products of its competitors in the financial services
industry.
The financial services industry, which is highly competitive and dynamic,
has recently undergone, and continues to undergo, a major consolidation of
participants. Competing providers of direct-marketed savings and investment
products include Net.B@nk and other Internet-based financial institutions.
Additionally, more traditional, branch-based financial services companies may be
able to adopt business strategies similar to those of the Company with relative
ease, and there are few barriers to market entry. Many of the financial
institutions and other companies with which the Company currently competes or
may compete in the future have significantly greater capital and management
resources than does the Company. Increased competition could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Competition."
SYSTEMS FAILURE AND SECURITY RISKS
The computer systems and network infrastructure used by TeleBank and the
Company may be vulnerable to unforeseen problems. TeleBank's operations are
dependent upon the ability of TeleBank to protect its computer equipment against
damage from fire, power loss, telecommunications failure or a similar
catastrophic event. Any damage or failure that causes an interruption in
TeleBank's operations could have a material adverse effect on the Company's
business, financial condition and results of operations. TeleBank also must
protect its computer systems and network infrastructure from physical break-ins,
security breaches and other disruptive problems caused by the Internet or other
users. Such computer break-ins and power disruptions could jeopardize the
security of information stored in and transmitted through such computer systems
and network infrastructure, which may result in significant liability to
TeleBank and the Company and would likely adversely affect the Company's ability
to retain or attract customers. The Company employs security systems, including
firewalls and password encryption, designed to minimize the risk of security
breaches, and relies on an outside third party service provider for back-up
Internet services and facilities. The Company also maintains insurance designed
to compensate the Company in the event of any accident, system failure or breach
of security. In addition, depositors' funds are insured by the FDIC to a maximum
of $100,000 per depositor. Although the Company intends to continue to implement
security technology and establish operational procedures to prevent break-ins,
damage and failures, there can be no assurance that these security measures will
be successful. A failure of such security measures could have a material adverse
effect on the Company's business, financial condition and results of operations.
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS
The Company intends to use the proceeds of the Offering to support the
continued growth of the Company, including its national direct marketing
initiatives, and for working capital and general corporate purposes. Management
will have broad discretion with respect to the expenditure of net proceeds of
the Offering. See "Use of Proceeds."
DEPENDENCE ON KEY PERSONNEL
The Company's success may depend upon the continued service of the
Company's senior management, including David A. Smilow, Chairman of the Board of
Directors, Mitchell H. Caplan, Vice Chairman of the Board of Directors, Chief
Executive Officer and President, Aileen Lopez Pugh, Executive Vice President and
8
<PAGE> 11
Chief Financial Officer, and Laurence Greenberg, Executive Vice President and
Chief Marketing Officer. The loss of service of any key personnel, or the
inability to attract additional qualified personnel, could have an adverse
effect on the Company's business, financial condition and results of operations.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, Mr. Smilow, Mr. Caplan, the TeleBanc
Financial Employee Stock Ownership Plan (the "ESOP"), of which Messrs. Smilow
and Caplan are the trustees, and the Company's directors and executive officers
as a group will beneficially own approximately 12.8%, 6.7%, 3.8% and 25.3%,
respectively, of the outstanding Common Stock (approximately 12.2%, 6.4%, 3.6%
and 24.0%, respectively, if the over-allotment option granted to the
Underwriters is exercised in full). As a result of such ownership, Mr. Smilow,
Mr. Caplan and the Company's directors and executive officers as a group will be
able to exercise significant control over the Company's management and affairs,
including the election of directors and the determination of all other matters
requiring stockholder approval, and will retain the power to block certain
business combinations in accordance with the TeleBanc Financial's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") and
bylaws (the "Bylaws"). See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have an aggregate of
11,114,448 shares of Common Stock outstanding. Of these shares, all of the
4,100,000 shares sold in the Offering and the 1,500,000 shares sold in the
Company's initial public offering will be freely transferable without
restriction or limitation under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares held by "affiliates" of the Company, as
such term is defined in Rule 144 under the Securities Act. The remaining
5,514,448 shares constitute "restricted securities" within the meaning of Rule
144. Of these "restricted securities," 3,405,951 shares have been held for two
years or longer and will be freely tradable upon completion of the Offering,
subject to the 180-day lock-up period described below (except for any shares
held by affiliates of the Company). In addition, the holders of 3,326,762 shares
have certain rights to have shares registered in the future under the Securities
Act pursuant to agreements between such holders and the Company. The Company,
its directors and executive officers and certain other stockholders who will
beneficially own, collectively, approximately 4,850,806 shares of Common Stock
after the Offering, have agreed not to offer or sell any shares of Common Stock
for a period of 180 days following the date of this Prospectus without the prior
written consent of BancAmerica Robertson Stephens, except that the Company may
issue shares of Common Stock in connection with acquisitions and pursuant to the
exercise of stock options described in this Prospectus. On the date of this
Prospectus, the Company had outstanding options to purchase 1,645,196 shares of
Common Stock and warrants to acquire 1,086,176 shares of Common Stock. Sales of
substantial amounts of shares of Common Stock in the public market after the
Offering, or the perception that such sales could occur, may adversely affect
the market price of the Common Stock. See "Shares Eligible for Future Sale."
MARKETABILITY OF COMMON STOCK
The Underwriters have advised the Company that they intend to make a market
in the Common Stock following consummation of the Offering. To date, however,
there has been a limited market for the Common Stock, and there can be no
assurance that, upon consummation of the Offering, an active market will develop
or be sustained. The trading price of the Common Stock could be subject to
significant fluctuations in response to quarterly fluctuations in the Company's
actual or anticipated results of operations, changes in general market
conditions and other factors. See "Price Range of Common Stock."
QUOTATION ON NASDAQ NATIONAL MARKET
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to notice of issuance. The Company believes that, upon
consummation of the Offering, the Company will satisfy the requirements for its
Common Stock to be quoted on the Nasdaq National Market. There can be no
assurance, however, that, upon approval, the listing will be maintained. If the
Company fails to comply with the
9
<PAGE> 12
maintenance criteria, the Common Stock may be delisted from quotation or trading
on such system and will be traded over the counter. The effects of delisting
include the limiting of public release of the market prices of the Company's
securities and coverage of the Company. Also, delisting may restrict investors'
interest in the Common Stock, materially adversely affect the trading market and
price of the Common Stock and the Company's ability to issue additional
securities or to secure additional financing.
LEGISLATIVE AND REGULATORY CONSIDERATIONS
Congress has been considering legislation in various forms which could
require a federally chartered savings bank, such as TeleBank, to convert its
charter to a national or state bank charter. If legislation is adopted that
requires TeleBank to convert its charter, TeleBanc Financial would become a bank
holding company subject to additional regulation, including restrictions on its
activities and the imposition of regulatory capital requirements. In the absence
of appropriate "grandfather" provisions, such legislation could have an adverse
effect on TeleBank and the Company. The Company is unable to predict whether,
and in what form, any such legislation is likely to be passed and the affect
such legislation might have on the Company or TeleBank. See
"Business -- Government Regulation -- Thrift Charter Legislation."
GOVERNMENT REGULATION
The Company is subject to federal regulatory oversight by the OTS as a
savings and loan holding company. TeleBank is subject to extensive regulation by
the OTS as its primary federal regulator and also by the FDIC and the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board"). Future
legislation or regulations may be adopted which could have an adverse effect on
the Company or TeleBank. In addition, TeleBank's non-traditional operating plan
may subject it to increased regulatory scrutiny.
TeleBank is subject to minimum capital and leverage requirements prescribed
by federal statute and OTS regulations. At March 31, 1998, TeleBank's regulatory
tangible, core, tier 1 and total capital ratios were 5.5%, 5.5%, 11.0% and
11.6%, respectively. TeleBank's capital ratios exceeded the requirements under
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") as well as the standards established for "well capitalized"
institutions under the prompt corrective action regulations issued pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). If
TeleBank were to fail to meet its regulatory capital requirements it would be
subject to additional restrictions and would be required by statute to file a
capital restoration plan with the OTS setting forth, among other things, the
steps TeleBank would take to become "adequately capitalized." The OTS could
choose not to accept the plan unless the Company guaranteed TeleBank's
compliance with the plan in writing. Finally, if TeleBank were to become
"critically undercapitalized" (which is defined to include institutions that
still have a positive net worth) it would be subject to the appointment of a
receiver or conservator.
TeleBank's ability to maintain or increase its capital levels in future
periods will be subject, among other things, to general economic conditions, the
Company's ability to raise new capital and the Company's ability and willingness
to make additional capital contributions to TeleBank. As a result, although
TeleBank's regulatory capital ratios at March 31, 1998 met the ratios
established for "well capitalized" institutions, there can be no assurance that
TeleBank will be able to maintain capital levels that meet the standards for
classification as "well capitalized" under the prompt corrective action
standards. See "Business -- Government Regulation -- Thrift Charter
Legislation."
RESTRICTIONS ON ABILITY TO PAY DIVIDENDS; PAYMENT OF FIXED OBLIGATIONS
The Company has never paid cash dividends on its Common Stock. The Company
currently does not intend to contribute all of the net proceeds from the
Offering to TeleBank, but to retain such funds for business purposes. The
Company does not intend to pay cash dividends on its Common Stock for the
foreseeable future. Further, the ability of the Company to pay dividends to its
stockholders is derived primarily from, and dependent upon, TeleBank's ability
to pay dividends to the Company. In general, TeleBank historically has paid
dividends to the Company only to the extent that funds are needed to cover
operating expenses, to service the debt of the Company, to pay dividends to
preferred stockholders, if any. TeleBank is
10
<PAGE> 13
subject to substantial regulatory restrictions on its ability to pay dividends
on its common stock. In addition, the Company is subject to a number of
contractual agreements that restrict its ability to pay dividends on the Common
Stock.
The Company relies on cash dividends from TeleBank to make payments on
certain obligations, including payments of interest on its debt. Additionally,
OTS regulations prohibit thrift institutions, such as TeleBank, from making
"capital distributions" (defined to include a cash distribution or a stock
redemption, but to exclude dividends in the form of additional capital stock)
unless the institution is at least "adequately capitalized." Currently, an
institution is considered "adequately capitalized" for this purpose if it has a
core capital ratio of at least 4.0%, a tier 1 capital ratio of at least 4.0%,
and a total capital ratio of at least 8.0%. At March 31, 1998, TeleBank's
tangible, core capital, tier 1 and total capital ratios of 5.5%, 5.5%, 11.0% and
11.6%, respectively, met the ratios established for "well capitalized"
institutions and, thus, exceeded the ratios established for "adequately
capitalized" institutions.
Under current OTS capital distribution regulations, as long as TeleBank
meets the OTS capital requirements before and after the payment of dividends, it
may pay dividends without prior OTS approval equal to the higher of (i) 100% of
net income to date over the calendar year and 50% of surplus capital existing at
the beginning of the calendar year or (ii) 75% of its net income over the most
recent four-quarter period. The OTS could require prior approval if it were to
determine that TeleBank was "in need of more than normal supervision." In
addition, the OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds, and must be given
30 days' advance notice of all capital distributions, during which time it may
object to any proposed distribution. As of March 31, 1998, approximately $11.0
million were available for payment of dividends by TeleBank to the Company under
applicable restrictions without regulatory approval. There can be no assurance
that such amounts can or will be paid as dividends. Also, TeleBanc Financial has
an aggregate annual interest payment obligation of $4.4 million on its 9.5%
Senior Subordinated Debentures (the "1997 Subordinated Debentures") issued in
February 1997, 11.5% Subordinated Debentures (the "1994 Subordinated Debentures"
and, with the 1997 Subordinated Debentures, the "Subordinated Debentures")
issued in the second quarter of 1994, and TCT I Junior Subordinated Debentures.
In addition, under the terms of the indentures for the 1994 Subordinated
Debentures and the TCT I Junior Subordinated Debentures, the Company presently
is required to maintain, on an unconsolidated basis, liquid assets in an amount
equal to or greater than $3.3 million. Any restrictions on TeleBank's payment of
dividends could adversely affect the Company's ability to make payments on the
debt, which could adversely affect the Company's stockholders. See "Dividend
Policy," "Business -- Government Regulation -- Sources of Funds for Cash
Dividends" "Description of Securities -- Subordinated Debt" and Note 12 to
Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
Significant uncertainty exists in the software industry concerning the
potential effects associated with "Year 2000" issues. In 1997, the Company
initiated a review and assessment of its hardware and software to confirm that
it will function properly in processing dates pertaining to the Year 2000. The
Company's core processing software vendor and the majority of its other vendors
have represented to the Company that their hardware and software are Year 2000
compliant. The Company intends to arrange for independent testing of its
hardware and software for compliance to be substantially completed before 1999.
There can be no assurance that the Company's software contains all necessary
date code changes. In addition, the Company outsources to third party service
providers many administrative functions associated with the financial services
that it provides to customers. Compliance with Year 2000 requirements may
disrupt the ability of the Company to conduct its business or otherwise service
its customers. Management does not currently expect that the costs related to
Year 2000 requirements will be material to the Company's financial condition or
results of operation. However, the Company's ability to predict the costs
associated with Year 2000 compliance is subject to some uncertainties, and the
Company may incur additional unexpected expenditures in connection with Year
2000 compliance, which could be material. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
11
<PAGE> 14
CERTAIN ANTITAKEOVER PROVISIONS AND REGULATORY RESTRICTIONS
TeleBanc Financial is subject to certain antitakeover provisions of the
General Corporation Law of the State of Delaware (the "DGCL") which could
discourage, delay or prevent a change in control of the Company. In addition,
the Company's Certificate of Incorporation and Bylaws contain certain provisions
that could delay, discourage or prevent an attempted acquisition or change of
control of the Company. These provisions include: (i) a staggered Board of
Directors; (ii) certain advance notice procedures for nomination of candidates
for election as directors and for stockholder proposals to be considered at an
annual meeting of stockholders; (iii) requirements for special meetings of
stockholders of the Company to be called by stockholders only upon the written
request of holders of at least a majority of the outstanding shares of capital
stock entitled to vote at any such meeting; (iv) the authorization of preferred
stock; (v) required approval for acquisitions of control; (vi) limitations on
control share acquisitions; and (vii) required two-thirds vote on amendments of
the Certificate of Incorporation and Bylaws. See "Description of Securities."
Under the Home Owners' Loan Act of 1933 and the OTS regulations relating to
the acquisition of control of savings associations, an individual or company,
alone or "acting in concert with others," that seeks to acquire more than 25% of
the Common Stock (or more than 10% of the Common Stock coupled with certain
"control factors") would be required to obtain prior approval of the OTS (or
rebut the presumption of control in the case of less than 25% shareholdings).
Any company that acquires control (as broadly defined in OTS regulations) of the
Company would become a "savings and loan holding company" subject to
supervision, regulation and examination by the OTS.
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to TeleBanc Financial from the sale of the 4,100,000
shares of Common Stock offered hereby (4,715,000 if the Underwriters'
over-allotment option is exercised in full) are estimated to be $50.9 million
($58.6 million if the Underwriters' over-allotment option is exercised in full),
assuming a price to the public of $13.50 per share (the mid-point of the price
range set forth on the cover of this Prospectus), and after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by the Company. TeleBanc Financial currently does not intend to contribute all
of the net proceeds from the Offering to TeleBank. The Company intends to use
the proceeds of the Offering to fund the continued growth of the Company,
including its national direct marketing initiatives, and for working capital and
general corporate purposes.
Simultaneously with the Offering, TCT II, a newly formed Delaware business
trust the beneficial ownership interests of which are owned by the Company, is
offering $25.0 million of BLUS(SM), the net proceeds of which will be invested
in % Junior Subordinated Deferrable Interest Debentures, Series A (the
"TCT II Junior Subordinated Debentures") to be issued by TeleBanc Financial. The
net proceeds from the BLUS(SM) Offering, estimated to be $ million
after deducting the underwriters' compensation and other expenses of the
BLUS(SM) Offering payable by TeleBanc Financial, will be used for working
capital and general corporate purposes. The Common Stock and the BLUS(SM) are
being sold in separate offerings, and the Company intends to complete the
Offering regardless of whether the BLUS(SM) Offering is consummated.
DILUTION
The pro forma net tangible book value of the Company at March 31, 1998 was
approximately $44.8 million, or $6.40 per share of Common Stock. Net tangible
book value per common share represents the amount of total tangible assets of
the Company reduced by the amount of its total liabilities and trust preferred
securities, divided by the total number of shares of Common Stock outstanding.
After giving effect to the net proceeds from the Offering and assuming the price
to the public is $13.50 per share of Common Stock (the mid-point of the range
set forth on the cover of this Prospectus), the pro forma net tangible book
value of the Company as of March 31, 1998 would have been $95.7 million, or
$8.62 per share of Common Stock. This represents an immediate dilution in pro
forma net tangible book value of $4.88 per share to the purchasers of Common
Stock in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public Offering price per share..................... $13.50
Pro forma net tangible book value per share at March 31,
1998................................................... $ 6.40
Increase attributable to new investors in the Offering.... 2.22
------
Pro forma net tangible book value per share after the
Offering.................................................. 8.62
------
Dilution per share to new investors......................... $ 4.88
======
</TABLE>
- ---------------
The foregoing table (i) includes 2,399,486 shares of Common Stock to be
issued upon the conversion (the "Preferred Stock Conversion") of 18,850
outstanding shares of Series A Voting Convertible Preferred Stock, par value
$.01 per share (the "Series A Preferred Stock"), 4,050 outstanding shares of
Series B Nonvoting Convertible Preferred Stock, par value $.01 per share (the
"Series B Preferred Stock"), and 7,000 shares of Series C Nonvoting Convertible
Preferred Stock, par value $.01 per share (the "Series C Preferred Stock" and,
collectively with the Series A Preferred Stock and the Series B Preferred Stock,
the "Preferred Stock") and 119,974 shares of Common Stock to be issued as a
dividend on the Preferred Stock immediately prior to completion of the Offering;
and (ii) does not include an aggregate of 1,645,196 shares and 1,086,176 shares
issuable at March 31, 1998 upon exercise of outstanding stock options and
warrants, respectively. In addition, the pro forma net tangible book value per
share does not include adjustments for the DFC Acquisition. See "Management" and
"Description of Securities."
13
<PAGE> 16
DETERMINATION OF OFFERING PRICE
The public offering price per share of Common Stock to be sold in the
Offering is estimated to be in the range of $12.50 to $14.50. The actual price
per share of Common Stock sold in the Offering will be determined by
negotiations between TeleBanc Financial and the Underwriters of the Offering.
See "Underwriting." It is currently expected, however, that the price per share
at which shares of Common Stock are offered and sold in the Offering will be
above the current price per share at which the Common Stock is trading in the
over-the-counter market. The Company and the Underwriters do not believe that
the current trading price reflects the fair value of the Common Stock as a
result of the relatively small amount of Common Stock that has been available to
trade in the public market prior to the Offering.
At June 18, 1998, the last reported sale price of the Common Stock in the
over-the-counter market was 10.125 per share. As of that same date, the Company
had outstanding 4,494,988 shares of Common Stock, of which 1,949,652 shares of
Common Stock (43.4%) were held by the Company's executive officers, directors
and the ESOP in the aggregate (without giving effect to 2,399,486 shares of
Common Stock to be issued upon the Preferred Stock Conversion and 119,974 shares
of Common Stock to be issued as a dividend on the Preferred Stock immediately
prior to completion of the Offering).
PRICE RANGE OF COMMON STOCK
Subject to completion of the Offering, the Company has applied to have the
Common Stock listed on the Nasdaq National Market under the symbol TBFC.
Currently, the Common Stock is traded in the over-the-counter market under the
symbol TBFC.
The following table sets forth, for the periods indicated, the range of
high and low sales price information per share of Common Stock, as reported on
the over-the-counter market:
<TABLE>
<CAPTION>
PERIOD HIGH(1) LOW(1)
- ------ ------- ------
<S> <C> <C>
1995
First Quarter...................................................... $ 2.875 $2.688
Second Quarter..................................................... 3.000 2.500
Third Quarter...................................................... 3.313 2.813
Fourth Quarter..................................................... 3.875 3.250
1996
First Quarter...................................................... $ 4.000 $3.875
Second Quarter..................................................... 4.875 4.000
Third Quarter...................................................... 5.000 4.438
Fourth Quarter..................................................... 6.625 4.875
1997
First Quarter...................................................... $ 8.500 $6.000
Second Quarter..................................................... 8.750 6.250
Third Quarter...................................................... 9.500 7.875
Fourth Quarter..................................................... 9.375 8.750
1998
First Quarter...................................................... $10.625 $8.875
Second Quarter (through June 18, 1998)............................. 10.313 9.875
</TABLE>
- ---------------
(1) The high and low sales price information per share of Common Stock has been
adjusted to reflect a 100% stock dividend paid on June 22, 1998 to holders
of record of the Common Stock as of June 11, 1998.
As of June 4, 1998, the Company had approximately 230 holders of record of
Common Stock.
DIVIDEND POLICY
TeleBanc Financial has never paid any cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its business. See "Description of Securities."
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at March 31, 1998 (i) on an actual basis, (ii) on a pro forma basis
to reflect the consummation of (a) its acquisition of substantially all of the
assets and assumption of substantially all of the liabilities of MET Holdings,
Inc. ("MET Holdings") in exchange for the issuance of 2,876,162 shares of Common
Stock (the "MET Holdings Transaction") which was completed on April 30, 1998,
(b) the DFC Acquisition, (c) the issuance of 2,399,486 shares of Common Stock
upon the Preferred Stock Conversion, and (d) the issuance of 119,974 shares of
Common Stock as a dividend on the Preferred Stock immediately prior to
completion of the Offering, and (iii) on a pro forma, as adjusted basis to give
effect to (a) the sale of Common Stock in the Offering and the investment of the
net proceeds therefrom, and (b) the BLUS(SM) Offering and the investment of the
net proceeds therefrom in the TCT II Junior Subordinated Debentures. See "Use of
Proceeds," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The information set forth in the table should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Subordinated debt, net................................... $ 29,672 $29,672 $ 29,672
Trust preferred securities (1)........................... 9,526 9,526 33,506
Stockholders' equity (2):
Preferred Stock, $.01 par value, 500,000 shares
authorized:
Series A Voting Convertible Preferred Stock, 18,850
issued and outstanding actual and pro forma, no
shares issued and outstanding pro forma, as
adjusted............................................ 9,634 -- --
Series B Nonvoting Convertible Preferred Stock, 4,050
issued and outstanding actual and pro forma, no
shares issued and outstanding, pro forma, as
adjusted............................................ 2,070 -- --
Series C Nonvoting Convertible Preferred Stock, 7,000
issued and outstanding actual and pro forma, no
shares issued and outstanding, pro forma, as
adjusted............................................ 3,577 -- --
Common Stock, $.01 par value, 29,500,000 shares
authorized, 7,014,448 shares issued and outstanding
actual and pro forma; 11,114,448 shares issued and
outstanding, pro forma, as adjusted.................... 22 48 88
Additional paid-in capital............................... 16,387 33,362 84,172
Retained earnings........................................ 11,850 10,230 10,230
Net unrealized gain on securities available for sale,
net of tax.......................................... 3,000 3,000 3,000
Total stockholders' equity (3)...................... 46,540 46,640 97,490
-------- ------- --------
Total capitalization........................... $ 85,738 $85,838 $160,668
======== ======= ========
</TABLE>
- ---------------
(1) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of TCT I. See Note 12 to Consolidated Financial
Statements. The Common Stock and the BLUS(SM) are being sold in separate
offerings, and the Company intends to complete the Offering regardless of
whether the BLUS(SM) Offering is consummated.
(2) Does not include 1,086,176 shares of Common Stock issuable upon the exercise
of outstanding warrants or 1,645,196 shares of Common Stock reserved for
issuance upon exercise of outstanding options granted to directors,
executive officers and key employees under the Company's 1994 Stock Option
Plan and 1997 Stock Option Plan. See "Management -- Stock Option Plans" and
"Description of Securities."
(3) If the over-allotment option granted to the Underwriters is exercised in
full, total stockholders' equity, pro forma, as adjusted, at March 31, 1998
would be $105.8 million.
15
<PAGE> 18
SELECTED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION AND STATEMENT OF OPERATIONS
The unaudited Pro Forma Condensed Consolidated Statement of Financial
Condition and Statement of Operations are presented to give pro forma effect to
(i) the MET Holdings Transaction and (ii) the DFC Acquisition. The DFC
Acquisition is expected to be completed in the summer of 1998, subject to
certain conditions, including receipt of regulatory approval. The pro forma
financial information has been prepared using the historical Consolidated
Financial Statements of the Company. The Pro Forma Condensed Consolidated
Statement of Financial Condition gives effect to the transactions described
above as if they had occurred as of March 31, 1998. The Pro Forma Condensed
Consolidated Statement of Operations gives pro forma effect to the above
transactions as if they had occurred on January 1, 1997 for the year ended
December 31, 1997, and on January 1, 1998 for the three months ended March 31,
1998.
The pro forma consolidated financial data of the Company have been derived
from and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus. The pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the financial position that would have occurred had
the transactions described above been effected on the dates assumed nor is the
pro forma financial information intended to be indicative of the Company's
future financial position or results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
MET HOLDINGS
AND DFC
COMPANY COMBINED PRO FORMA
HISTORICAL HISTORICAL(a) ADJUSTMENT PRO FORMA
---------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income......................... $59,301 $23,308 $ -- $82,609
Interest expense........................ 46,063 18,431 -- 64,494
------- ------- ----- -------
Net interest income................. 13,238 4,877 -- 18,115
Provision for loan losses............... 921 456 -- 1,377
Non-interest income..................... 4,093 3,155 -- 7,248
Non-interest expense:
Selling, general and administrative
expenses.......................... 9,042 4,212 -- 13,254
Other non-interest expense.......... 1,100 -- 510(b) 1,610
------- ------- ----- -------
Income before income tax, minority
interest and preferred dividend....... 6,268 3,364 (510) 9,122
Income tax expense...................... 1,657 471 -- 2,128
Minority interest....................... 394 -- -- 394
------- ------- ----- -------
Net income from continuing operations
before nonrecurring charges directly
attributable to the transaction and
preferred dividend.................... $ 4,217 $ 2,893 $(510) $ 6,600
======= ======= ===== =======
Preferred dividend...................... 546 180 -- 726
Net income available to common
stockholders.......................... $ 3,671 $ 2,713 $(510) $ 5,874
======= ======= ===== =======
Earnings per share:
Basic............................... $ 0.84 $ 1.34
Diluted............................. $ 0.57 $ 0.89
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------
MET HOLDINGS
AND DFC
COMPANY COMBINED PRO FORMA
HISTORICAL HISTORICAL(a) ADJUSTMENT PRO FORMA
----------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income......................... $18,071 $5,528 $ -- $23,599
Interest expense........................ 14,477 4,568 -- 19,045
------- ------ ----- -------
Net interest income................. 3,594 960 -- 4,554
Provision for loan losses............... 250 130 -- 380
Non-interest income..................... 1,947 228 -- 2,175
Non-interest expense:
Selling, general and administrative
expenses.......................... 3,889 880 -- 4,769
Other non-interest expense.......... 315 -- 128(b) 443
------- ------ ----- -------
Income before income tax, minority
interest and preferred dividend....... 1,087 178 (128) 1,137
Income tax expense...................... 475 13 -- 488
Minority interest....................... 176 -- -- 176
------- ------ ----- -------
Net income from continuing operations
before nonrecurring charges directly
attributable to the transaction and
preferred dividend.................... $ 436 $ 165 $(128) $ 473
======= ====== ===== =======
Preferred dividend...................... 162 -- -- 162
Net income available to common
stockholders.......................... $ 274 $ 165 $(128) $ 311
======= ====== ===== =======
Earnings per share:
Basic............................... $ 0.06 $ 0.07
Diluted............................. $ 0.05(c) $ 0.05
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------------------------------------------
MET HOLDINGS
AND DFC
COMPANY COMBINED PRO FORMA
HISTORICAL HISTORICAL(d) ADJUSTMENT PRO FORMA
----------- ------------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Assets:
Cash and cash equivalents............................... $ 31,559 $ 6,471 $ (8,566)(e) $ 29,464
Loans receivable, net................................... 557,057 182,079 -- 739,136
Mortgage-backed securities.............................. 260,152 25,524 -- 285,676
Investment securities................................... 123,963 33,914 3,600(f) 161,477
Other assets............................................ 75,422 94,154 (11,482)(g) 158,094
---------- -------- -------- ----------
Total assets............................................ $1,048,153 $342,142 $(16,448) $1,373,847
========== ======== ======== ==========
Liabilities:
Retail deposits......................................... $ 560,554 $288,731 $ -- $ 849,285
Brokered callable certificates of deposit............... 42,286 -- -- 42,286
Advances from the FHLB.................................. 190,000 10,500 -- 200,500
Reverse repurchase agreements and other borrowings...... 153,970 2,495 19,000(h) 175,465
Other liabilities....................................... 45,277 8,925 (4,057)(i) 50,145
---------- -------- -------- ----------
Total liabilities....................................... 992,087 310,651 14,943 1,317,681
Trust preferred securities(k)............................... 9,526 -- -- 9,526
Total stockholders' equity.................................. 46,540 31,491 (31,391)(j) 46,640
---------- -------- -------- ----------
Total liabilities and stockholders' equity.............. $1,048,153 $342,142 $(16,448) $1,373,847
========== ======== ======== ==========
</TABLE>
- ---------------
(a) Reflects the combined statement of operations of MET Holdings and DFC for
the year ended December 31, 1997 and the three months ended March 31, 1998.
(b) Reflects the amortization of goodwill for the year ended December 31, 1997
and the three months ended March 31, 1998 ($510 and $128, respectively)
recognized in conjunction with the DFC Acquisition.
(c) The impact of the convertible Preferred Stock is antidilutive for the three
months ended March 31, 1998. The Preferred Stock will convert to Common
Stock in the Preferred Stock Conversion. See "Capitalization." Basic
earnings per share in future periods will be reduced as a result of the
issuance of 2,399,486 shares of Common Stock in the Preferred Stock
Conversion and 119,974 shares of Common Stock issuable as a dividend on the
Preferred Stock immediately prior to the consummation of the Offering.
(d) Reflects the combined statements of financial condition of MET Holdings and
DFC as of March 31, 1998.
(e) Reflects the cash amount paid by TeleBanc Financial to acquire DFC
($21,400), plus the amount paid for expenses related to the MET Holdings
Transaction and the elimination of intercompany deposits ($1,109), and the
amount used to payoff the outstanding subordinated debentures of DFC
($5,057), net of the proceeds received through borrowings ($19,000).
(f) Reflects the mark-to-market adjustment recognized in conjunction with the
acquisition of AFS Investment Securities, a wholly owned subsidiary of DFC
which will be acquired by the Company in the DFC Acquisition ($3,600).
(g) Reflects the elimination of MET Holdings' equity interest in TeleBanc
Financial ($19,169), net of a mark-to-market adjustment for MET Holdings'
equity investment in an unrelated entity ($31). These adjustments also
include goodwill to be recognized in conjunction with the DFC Acquisition
($7,656).
(h) Reflects additional reverse repurchase agreements entered into in
connection with the DFC Acquisition ($19,000).
(i) Reflects the payoff of outstanding subordinated debentures of DFC ($5,057)
in connection with the DFC Acquisition, net of additional liabilities
incurred in connection with the DFC Acquisition.
(j) Reflects (i) the acquisition by the Company of DFC's assets and
liabilities, and the assets (including 2,866,162 shares of Common Stock
owned by MET Holdings) and liabilities of MET Holdings, and (ii) the
issuance of 2,876,162 shares of Common Stock to MET Holdings. The DFC
Acquisition and the MET Holdings Transaction are accounted for as a
purchase in which the assets and liabilities of DFC and MET Holdings will
be recorded at fair value on the Consolidated Financial Statements of the
Company.
(k) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TCT I. See "Description of
Securities" and Note 12 to Consolidated Financial Statements.
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents selected statement of operations data and
statement of financial condition data of the Company on a consolidated basis for
each of the five years in the period ended December 31, 1997, and for the three
months ended March 31, 1997 and 1998. The selected historical consolidated
financial data presented below for each of the years in the period ended
December 31, 1997, are derived from the audited Consolidated Financial
Statements of the Company. Such data should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
elsewhere in this Prospectus. The selected unaudited consolidated financial data
for the three months ended March 31, 1998, presented below are based on the
unaudited Consolidated Financial Statements of the Company for the period ended
and as of March 31, 1998, which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income............................... $ 16,667 $ 22,208 $ 40,511 $ 45,800 $ 59,301 $ 12,837 $ 18,071
Interest expense.............................. 11,828 17,513 31,946 34,815 46,063 9,878 14,477
--------- --------- --------- --------- --------- --------- ---------
Net interest income....................... 4,839 4,695 8,565 10,985 13,238 2,959 3,594
Provision for loan losses..................... 211 492 1,722 919 921 243 250
Non-interest income........................... 1,157 175 3,777 2,756 4,093 618 1,947
Non-interest expenses:
Selling, general and administrative
expenses................................ 2,997 3,503 5,561 8,375 9,042 1,897 3,889
Other non-interest expenses............... 739 153 679 700 1,100 208 315
--------- --------- --------- --------- --------- --------- ---------
Income before income tax, cumulative effect of
change in accounting principle and minority
interest.................................... 2,049 722 4,380 3,747 6,268 1,229 1,087
Income tax expense............................ 842 182 1,660 1,195 1,657 355 475
Cumulative effect of change in accounting
principle................................... 170 -- -- -- -- -- --
Minority interest............................. -- -- -- -- 394 -- 176
Preferred stock dividend...................... -- -- -- -- 546 60 162
--------- --------- --------- --------- --------- --------- ---------
Net income available to common stockholders... $ 1,377 $ 540 $ 2,720 $ 2,552 $ 3,671 $ 814 $ 274
========= ========= ========= ========= ========= ========= =========
Earnings per share:
Basic..................................... $ 0.53 $ 0.16 $ 0.66 $ 0.62 $ 0.84 $ 0.19 $ 0.06
Diluted................................... $ 0.53 $ 0.16 $ 0.66 $ 0.58 $ 0.57 $ 0.15 $ 0.05
Weighted average shares:
Basic..................................... 2,599 3,498 4,099 4,099 4,383 4,212 4,468
Diluted................................... 2,599 3,498 4,104 4,406 7,411 5,790 5,757
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------- -----------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets.................................... $220,301 $427,292 $553,943 $647,965 $1,100,352 $1,048,153
Loans receivable, net........................... 100,859 154,742 248,492 351,821 540,704 557,057
Mortgage-backed securities (1).................. 80,782 236,464 234,385 184,743 319,203 260,152
Investment securities (1)....................... 18,110 12,444 40,058 78,826 91,237 123,963
Retail savings and certificates of deposit...... 113,132 212,411 306,500 390,486 522,221 560,554
Advances from the FHLB.......................... 61,000 96,000 105,500 144,800 200,000 190,000
Securities sold under agreements to
repurchase.................................... 29,642 79,613 93,905 57,581 279,909 153,970
Trust preferred securities (2).................. -- -- -- -- 9,572 9,526
Total stockholders' equity...................... 12,378 17,028 21,565 24,658 45,824 46,540
OTHER FINANCIAL AND OPERATING DATA:
Return on average total assets.................. 0.61% 0.17% 0.53% 0.61%(3) 0.45% 0.11%
Return on average stockholders' equity.......... 11.79% 3.17% 14.10% 16.50%(3) 9.17% 2.58%
SG&A expenses to total assets................... 1.36% 0.82% 1.00% 1.03%(3) 0.82% 1.48%
Number of deposit accounts...................... 2,932 8,564 12,919 16,506 21,817 22,916
CAPITAL RATIOS OF TELEBANK:
Core............................................ 5.39% 6.27% 5.31% 5.08% 5.06% 5.48%
Tangible........................................ 5.38 6.35 5.36 5.07 5.06 5.48
Total capital................................... 14.75 15.96 11.74 10.41 11.91 11.60
</TABLE>
- ---------------
(1) Includes available-for-sale, held-to-maturity, held-for-sale, and trading.
(2) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of TCT I. TCT I is a business trust formed for the
purpose of issuing capital securities and investing the proceeds in the TCT
I Junior Subordinated Debentures issued by the Company. See "Description of
Securities" and Note 12 to Consolidated Financial Statements.
(3) Excludes one-time pre-tax charge of $1.7 million ($1.1 million after tax) to
recapitalize the Savings Association Insurance Fund ("SAIF"). Giving effect
to the charge, return on average total assets, return on average
stockholders' equity, and selling, general and administrative expenses to
total assets for 1996 were 0.42%, 11.4% and 1.29%, respectively.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company utilizes a branchless banking strategy through which it offers
financial products and services to customers nationwide using alternative
delivery platforms, including the telephone, the Internet, ATMs, facsimile and
mail. Prior to its acquisition by members of present management in 1989, the
Company operated as a traditional community savings bank. In 1989, management
changed the Company's growth strategy using direct marketing to offer, through
electronic delivery channels, high value financial products and services, which
generally offer higher interest rates or lower fees than those offered by
traditional financial institutions.
The Company primarily generates revenue in the form of net interest income
and, to a lesser degree, non-interest income which includes fees and commissions
for services and gains on the sale of assets. Net interest income is the
"spread" or difference between the rates of interest earned on loans and other
interest-earning assets, and the rates of interest 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 may materially
affect net interest income.
The Company's asset acquisition strategy is to purchase pools of mortgages
secured by one-to-four family residences and mortgage-related securities. The
Company does not currently originate loans. The Company believes that by
purchasing a seasoned and geographically diverse loan portfolio, it reduces
expenses related to loan origination, and is able to actively manage credit
quality risk.
TeleBank manages its interest rate risk by analyzing the maturities and
repricing of its deposits and other sources of funding, and seeking to match the
maturities of these instruments with the maturities of the assets in its loan
portfolio. In an effort to manage interest rate exposure, TeleBank uses various
hedging techniques such as interest rate swaps, caps, swaptions, floors, collars
and financial options. TeleBank actively monitors its interest rate sensitivity
in a variety of interest rate environments.
The Company plans to build the "TeleBank" franchise identity based on its
high value savings and investment and other financial products, superior
customer service and anywhere, anytime convenience. The Company believes that
associating its brand name with its services and delivery channels will enable
it to capture the growing market of customers who are increasingly relying on
alternative channels for the delivery of their financial services. In pursuing
this strategy, the Company plans to increase significantly its marketing
expenditures for the foreseeable future to implement a targeted, national
advertising campaign and marketing initiative.
DFC ACQUISITION
Consistent with its operating strategy, the Company has signed an agreement
to acquire DFC, a thrift holding company and its federally chartered savings
bank subsidiary, Premium Bank, in a transaction expected to be consummated in
the summer of 1998, subject to regulatory approval. TeleBanc Financial is
acquiring DFC because DFC has employed a direct marketing strategy similar to
that of the Company, and thus presents the opportunity for the Company to
acquire the deposits and customers of a financial institution without acquiring
significant infrastructure. DFC currently operates from a single branch in New
Jersey located approximately 30 miles outside of Philadelphia, Pennsylvania, and
its customer and deposit base is concentrated in the mid-Atlantic region of the
United States. The Company does not intend to retain any significant portion of
DFC's employees and intends to close DFC's single branch location. DFC also
originates residential mortgage loans, although the Company intends to
discontinue mortgage loan origination upon its acquisition of DFC. DFC also
offers credit cards to its customers through a relationship with First Data
Resources and Card Management Services. During 1998, in reliance upon DFC's
existing credit card relationships, the Company also intends to offer its
customers a co-branded credit card.
19
<PAGE> 22
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
Total interest income increased by $5.3 million to $18.1 million for the
three months ended March 31, 1998 from $12.8 million for the three months ended
March 31, 1997, an increase of 41.4%. Total interest expense increased $4.6
million to $14.5 million for the three months ended March 31, 1998 from $9.9
million for the three months ended March 31, 1997, an increase of 46.6%.
Non-interest income increased by $1.3 million to $1.9 million for the three
months ended March 31, 1998 from $618,000 for the three months ended March 31,
1997, an increase of 215%, primarily as a result of increased income from the
Company's loans held-for-sale portfolio, loan fees on the Company's loan
portfolio, and sales of liquid securities. Non-interest expenses increased $2.1
million to $4.2 million for the three months ended March 31, 1998, compared to
$2.1 million for the three months ended March 31, 1997, an increase of 99.7%,
primarily attributable to marketing and operating expenses directly associated
with TeleBank brand building and customer acquisition campaigns. Net income for
the three months ended March 31, 1998 decreased $438,000 to $436,000, compared
to $874,000 for the three months ended March 31, 1997, a decrease of 50%.
With the anticipated consummation of the DFC Acquisition and a
corresponding increase in assets of approximately $320 million, management
maintained assets at relatively stable levels in the first quarter of 1998. As
of March 31, 1998, assets totaled $1.0 billion, a $52.2 million decline, from
the $1.1 billion level as of December 31, 1997. Cash and cash equivalents
declined by $60.6 million to $31.6 million at March 31, 1998, from $92.2 million
at December 31, 1997, a decrease of 65.7%. Trading securities, investment
securities available for sale and mortgage-backed securities available for sale
decreased by $5.4 million to $426.2 million at March 31, 1998 from $431.6 at
December 31, 1997. Loans receivable, net increased $27.1 million to $418.7
million at March 31, 1998 from $391.6 million at December 31, 1997, an increase
of 6.9%. Loans receivable held for sale decreased $10.7 million to $138.4
million at March 31, 1998 from $149.1 million at December 31, 1997. While the
Company's corresponding liability levels also remained stable, deposits
increased $38.3 million, or 7.3%, to $560.5 million at March 31, 1998 from
$522.2 million at December 31, 1997 and retail customer accounts grew 4.6% from
the prior quarter to approximately 22,000 at March 31, 1998. In the first
quarter of 1998, the Company also sold brokered callable certificates of
deposit, which totaled $42.3 million at March 31, 1998. FHLB advances and other
borrowings declined by $133.5 million to $389.2 million at March 31, 1998 from
$522.7 at December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Interest Income. Total interest income increased by $13.5 million to $59.3
million for the year ended December 31, 1997 from $45.8 million for the year
ended December 31, 1996, an increase of 29.5%. This increase is due primarily to
the $11.6 million increase in interest income on mortgages and other loans, an
increase of 50.4% in 1997, principally due to a significant increase in the
average loan balance during the period. Interest income on mortgage-backed and
related securities decreased slightly to $17.6 million at December 31, 1997 from
$18.0 million at December 31, 1996 largely as a result of a decline in the
yield.
Interest Expense. Total interest expense increased by $11.3 million to
$46.1 million for the year ended December 31, 1997 from $34.8 million for the
year ended December 31, 1996, an increase of 32.5%. The increase is attributable
to both an increase in interest-bearing liabilities and a slight increase in the
average interest rate paid.
Loan Loss Provision. The provision for loan losses is the annual cost of
providing an allowance for estimated losses in the loan portfolio, and reflects
management's judgment as to the reserve necessary to absorb loan losses based
upon the Company's assessment of a number of factors, including its delinquent
loan trends and historical loss experience, current and anticipated economic
conditions, the mix of loans in the Company's portfolio, and the Company's
internal credit review process. The provision for loan losses remained
substantially unchanged at $921,000 for the year ended December 31, 1997,
compared to $919,000 for the year ended December 31, 1996, despite a significant
increase in the loan portfolio primarily because the Company historically has
experienced a low level of net charge-offs due in part to its focus on
residential mortgage assets. The ratio of net charge-offs to net average loans
outstanding during 1997 was 0.06%,
20
<PAGE> 23
compared to 0.10% during 1996. Total loan loss allowance as a percentage of
total non-performing loans was 31.0% as of December 31, 1997, compared to 26.3%
as of December 31, 1996.
Non-interest Income. Total non-interest income increased by $1.3 million
to $4.1 million for the year ended December 31, 1997, from $2.8 million for the
year ended December 31, 1996, an increase of 46.4%. Non-interest income
increased primarily because the Company recognized $1.2 million of non-interest
income as gain on trading securities during 1997. In addition, the Company
recognized an $864,000 decline in equity investment primarily attributable to
the write-off of the equity investment by TeleBank in AGT Mortgage Services,
LLC, which had provided loan servicing services for a fee and ceased operations
in July 1997.
Non-interest Expenses. Total non-interest expenses, principally selling,
general and administrative expenses, increased $1.1 million to $10.1 million for
the year ended December 31, 1997, from $9.1 million for the year ended December
31, 1996, an increase of 11.8%. Selling, general and administrative expenses
increased $600,000 to $9.0 million during 1997 from $8.4 million during 1996, an
increase of 7.1%, primarily as a result of a $1.2 million increase in
compensation and employee benefits in 1997. During 1996, the Company incurred a
one-time $1.7 million assessment to recapitalize the SAIF. See
"Business -- Government Regulation." Other general and administrative expenses
increased $1.1 million, principally as a result of increased marketing expenses
to support a growing deposit base and the building of brand identity.
Other non-interest expenses increased $1.1 million to $4.1 million during
the year December 31, 1997 from $3.0 million during the year ended December 31,
1996, an increase of 36.7%, primarily as a result of increased advertising
expenses, increased office occupancy costs and an increased amortization of
purchased mortgage servicing rights.
Income Tax Expense. Income tax expense for the year ended December 31,
1997 was $1.7 million, compared with $1.2 million for the year ended December
31, 1996. The Company's effective tax rate for 1997 was 26.4%, compared to 31.9%
for 1996. The effective tax rate decreased largely as a result of an increase
during 1997 in interest earned on municipal bonds, which generally were
tax-exempt.
Net Income. Net income for the year ended December 31, 1997 increased $1.1
million to $3.7 million from $2.6 million for the year ended December 31, 1996,
an increase of 42.3%. 1997 net income consisted primarily of $13.2 million in
net interest income, $3.3 million in net gain on the sale of trading securities,
principally loans held for sale, and mortgage-backed and investment securities,
which was offset by $10.1 million in non-interest expenses, $921,000 in
provision for loan losses, and $1.7 million in income tax expense. The Company's
return on average assets and return on average equity for the year ended
December 31, 1997 were 0.45% and 9.17%, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Interest Income. Total interest income increased by $5.3 million to $45.8
million for the year ended December 31, 1996 from $40.5 million for the year
ended December 31, 1995, an increase of 13.1%. The increase is due primarily to
a $5.4 million increase in interest income on mortgages and other loans, an
increase of 30.5% in 1996, principally due to a $77.3 million increase in the
average loan balance during the period. Interest income on mortgage-backed
securities held-to-maturity and available-for-sale decreased to $18.0 million at
December 31, 1996 from $20.2 million at December 31, 1995 largely as a result of
a decline in average balances.
Interest Expense. Total interest expense increased by $2.9 million to
$34.8 million for the year ended December 31, 1996 from $31.9 million for the
year ended December 31, 1995, an increase of 9.1%. The increase is attributable
to an increase in interest-bearing liabilities, offset in part by a decline in
interest cost.
Loan Loss Provision. The provision for loan losses declined to $919,000
for the year ended December 31, 1996, compared to $1.7 million for the year
ended December 31, 1995, despite a significant increase in the size of the loan
portfolio, primarily because the Company experienced a low level of actual net
charge-offs due in part to its focus on residential mortgage assets. The total
loan loss allowance as of December 31, 1996 was $3.0 million from $2.3 million
at December 31, 1995, which were 0.80% and 0.90% of total loans
21
<PAGE> 24
outstanding at such dates, respectively. Total loan loss allowance as a
percentage of total non-performing loans was 26.3% as of December 31, 1996,
compared to 43.4% as of December 31, 1995.
Non-interest Income. Total non-interest income declined by $1.0 million to
$2.8 million for the year ended December 31, 1996, from $3.8 million for the
year ended December 31, 1995, a decrease of 26.3%. Fees, service charges and
other income increased by $814,000 in 1996, in large part as a result of fees
collected on $2.8 million in purchased mortgage servicing rights, and gain on
loans held for sale increased by $642,000 in 1996, which were primarily offset
by an $870,000 decrease in mortgage-backed securities available for sale, a
$924,000 decrease in investment securities available for sale and a $628,000
decrease in trading account income.
Non-interest Expenses. Total non-interest expenses increased $2.9 million
to $9.1 million for the year ended December 31, 1996 from $6.2 million for the
year ended December 31, 1995, an increase of 46.8%. Selling, general and
administrative expenses increased $2.8 million to $8.4 million for the year
ended December 31, 1996 from $5.6 million for the year ended December 31, 1995,
an increase of 50%, primarily because of the $1.7 million one-time SAIF
assessment incurred in 1996. See "Business -- Government Regulation." In
addition, compensation and employee expenses increased by $660,000 as a result
of adding employees and higher performance-based bonuses, the TeleBank federal
deposit insurance premium increased by $483,000, and administrative expenses
generally increased as a result of an increased deposit base.
Other non-interest expenses increased slightly because of an increase in
amortization of purchased mortgage servicing rights, offset by a decline in real
estate owned expense.
Income Tax Expense. Income tax expense for the year ended December 31,
1996 was $1.2 million, compared with $1.7 million for the year ended December
31, 1995. The Company's effective tax rate for the year ended December 31, 1996
was 31.9%, compared to 37.9% for the year ended December 31, 1995.
Net Income. Net income for the year ended December 31, 1996 decreased
$168,000 to $2.6 million from $2.7 million for the year ended December 31, 1995,
a decrease of 6.2%. Net income for the year ended December 31, 1996 included the
one-time $1.7 million SAIF assessment. Excluding the one-time assessment, 1996
net income would have been $3.6 million. Net income consisted primarily of $11.0
million in net interest income and $1.8 million in net gain on the sale of
trading securities, principally loans held for sale and mortgage-backed and
investment securities, which was offset by $9.1 million in non-interest
expenses, $919,000 in provision for loan losses, and $1.2 million in income tax
expense. The Company's return on average assets and return on average equity for
the year ended December 31, 1996 were 0.61% and 16.50%, respectively. Earnings
per share, on a fully diluted basis, were $0.58 for 1996.
QUARTERLY RESULTS
The following table sets forth certain selected unaudited quarterly
financial data of the Company for each of the eight quarters in the two-year
period ended March 31, 1998. The consolidated financial data presented below
have been prepared on a basis consistent with the Company's audited Consolidated
Financial Statements included elsewhere in this Prospectus and, in the opinion
of management, include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of such information. This information should
be read in conjunction with the Company's audited Consolidated Financial
Statements and the Notes thereto and the unaudited quarterly Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period.
22
<PAGE> 25
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Interest income............. $11,364 $11,871 $11,433 $12,837 $15,275 $14,821 $16,368 $18,071
Interest expense............ 8,449 9,034 8,975 9,878 11,865 11,548 12,772 14,477
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 2,915 2,837 2,458 2,959 3,410 3,273 3,596 3,594
Provision for loan losses... 200 125 175 243 308 120 250 250
Non-interest income......... 291 540 1,320 607 1,244 1,084 1,158 1,947
SG&A........................ 1,749 3,287 1,660 1,897 2,251 2,078 2,816 3,889
Other non-interest operating
expenses.................. 81 247 71 208 202 260 430 315
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes
and minority interest..... 1,176 (282) 1,872 1,218 1,893 1,899 1,258 1,087
Income tax expense.......... 417 (220) 667 355 618 709 (25) 475
Minority interest in
subsidiary................ -- -- -- -- 67 285 42 176
------- ------- ------- ------- ------- ------- ------- -------
Net income.................. 759 (62) 1,205 863 1,208 905 1,241 436
Preferred stock dividends... -- -- -- 60 162 162 162 162
------- ------- ------- ------- ------- ------- ------- -------
Net income available to
common stockholders....... $ 759 $ (62) $ 1,205 $ 803 $ 1,046 $ 743 $ 1,079 $ 274
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share.... $ 0.19 $ (0.02) $ 0.30 $ 0.19 $ 0.24 $ 0.16 $ 0.24 $ 0.06
Diluted earnings per
share..................... 0.18 (0.02) 0.26 0.15 0.16 0.11 0.16 0.05
</TABLE>
The Company's quarterly results of operations may be subject to significant
fluctuations due to several factors, including interest rate fluctuations,
economic factors, the level of marketing expenditures to implement the Company's
growth strategy, the performance of the Company's loan portfolio and other
interest-earning assets, retention and growth of deposits, and other factors.
The Company anticipates that its operating expenses, principally marketing and
compensation expenses, will increase significantly for the foreseeable future.
If the Company's net interest income in any quarter does not increase
correspondingly, the Company's results of operations for that quarter would be
materially adversely affected. Accordingly, the Company does not believe that
quarter-to-quarter comparisons of the results of operations are meaningful and
the results of operations in any particular quarter should not be relied upon as
necessarily indicative of future performance.
FINANCIAL CONDITION
The Company's total assets increased by $452.0 million to $1.1 billion at
December 31, 1997 from $648.0 million at December 31, 1996, an increase of
69.8%. The growth in total assets is primarily the result of a $188.9 million
increase in loans receivable and a $134.5 million increase in mortgage-backed
securities. The primary sources of funds for this growth in assets were deposits
and borrowings.
Loans receivable, net and loans receivable held for sale, increased $188.9
million to $540.7 million at December 31, 1997 from $351.8 million at December
31, 1996, an increase of 53.7%. The increase reflects whole loan purchases of
$342.9 million, offset in part by $95.1 million of principal repayments and
$60.7 million of loans sold in 1997. During 1996, the Company recorded whole
loan purchases of $183.1 million, offset in part by $50.2 million of principal
repayments and $27.1 million of loans sold. In mid-1996, as part of a change in
its loan investment strategy, the Company reclassified certain loans as "loans
held-for-sale." Loans held-for-sale generally are susceptible to sale after
restructuring or credit enhancement and are recorded at the lower of cost or
market.
Mortgage-backed securities available-for-sale increased $134.5 million to
$319.2 million at December 31, 1997 from $184.7 million at December 31, 1996, an
increase of 72.8%. Investment securities available-for-sale increased $12.4
million to $91.2 million at December 31, 1997 from $78.8 million at December 31,
1996, an increase of 15.7%. These securities are held for liquidity purposes and
the increases in these categories of assets is consistent with the overall
growth of the Company's assets in 1997.
23
<PAGE> 26
Deposits increased $131.7 million to $522.2 million at December 31, 1997
from $390.5 million at December 31, 1996, an increase of 33.7%, largely as a
result of the Company's continued targeted marketing efforts to attract money
market accounts and CDs. During the year ended December 31, 1997, approximately
$25.9 million of interest was credited to deposit accounts and deposits exceeded
withdrawals by $105.8 million, resulting in the net overall increase in
deposits. During 1997, the Company completed a systems conversion to an
integrated platform for marketing, deposit operations, and accounting and
finance, to support future growth and the introduction of new products and
services.
FHLB advances increased $55.2 million to $200.0 million at December 31,
1997, from $144.8 million at December 31, 1996, an increase of 38.1%. Other
borrowings, composed of securities sold under agreements to repurchase,
increased $222.3 million to $279.9 million at December 31, 1997 from $57.6
million at December 31, 1996, an increase of 385.9%. At December 31, 1997,
subordinated debt, net of original issue discount, consisting of the
Subordinated Debentures totaled $29.6 million. In June 1997, the Company formed
TCT I for the purpose of offering and selling in a private placement an
aggregate of $10.0 million in shares of capital securities, Series A, which have
an annual dividend rate of 11.0% payable semiannually, beginning in December
1997.
Stockholders' equity increased $21.1 million to $45.8 million at December
31, 1997 from $24.7 million at December 31, 1996. The increase is the result of
the receipt of $15.3 million in proceeds from the issuance of the Preferred
Stock in February 1997, the receipt of $1.5 million from the issuance of 162,461
shares of Common Stock in February 1997 in exchange for the assets of Arbor
Capital Partners Inc., a former affiliate of the Company, $4.2 million in net
income, and an unrealized gain on securities available for sale of $642,000, net
of taxes, in 1997, which increased the Company's stockholders' equity, but did
not affect the Company's results of operations.
LIQUIDITY
Liquidity represents the Company's ability to raise funds to support asset
growth, fund operations and meet obligations, including deposit withdrawals,
maturing liabilities, and other payment obligations, to maintain reserve
requirements and to otherwise meet its ongoing obligations. During the past
three years, the Company has met its liquidity needs primarily through financing
activities, consisting principally of increases in core deposit accounts,
maturing short-term investments, loans and repayments of investment securities,
and to a lesser extent, sales of loans or securities. The Company believes that
it will be able to renew or replace its funding sources at then existing market
rates, which may be higher or lower than current rates. Pursuant to applicable
OTS regulations, TeleBank is required to maintain an average liquidity ratio of
5.0% of certain borrowings and its deposits, which requirement it fully met
during 1997 and 1996. Effective November 24, 1997, this requirement has been
lowered to 4.0%. See "Business -- Government Regulation -- Liquidity
Requirements."
The Company seeks to maintain a stable funding source for future periods in
part by attracting core deposit accounts, which are accounts that tend to be
relatively stable even in a changing interest rate environment. Typically,
accounts that maintain a relatively high balance and time deposit accounts
provide a relatively stable source of funding. Retail deposits increased $38.3
million to $560.5 million, an increase of 7.3% during the three months ended
March 31, 1998. Retail customer accounts increased 4.6% from the prior quarter
to approximately 22,000 accounts at March 31, 1998. Savings deposits increased
$11.7 million to $123.6 million during the year ended December 31, 1997, an
increase of 10.5%. CDs increased $120.0 million to $398.6 million during the
year ended December 31, 1997, an increase of 43.1%.
24
<PAGE> 27
The following table shows the changes in deposits for each of the periods
indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------- MARCH 31,
1995 1996 1997 1998
------------ -------- -------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period.................... $212,411 $306,500 $390,486 $522,221
Deposits in excess of withdrawals................. 76,866 62,629 105,777 30,278
Interest credited on deposits..................... 17,223 21,357 25,958 8,055
-------- -------- -------- --------
Balance at end of period.......................... $306,500 $390,486 $522,221 $560,554
======== ======== ======== ========
</TABLE>
The Company also relies upon borrowed funds to provide liquidity. The
Company's total borrowings increased $277.5 million to $ 479.9 million at
December 31, 1997, an increase of 137.1%. Advances from the FHLB increased $55.2
million to $200.0 million during 1997, an increase of 38.1%. Securities sold
under agreements to repurchase increased $222.3 million to $279.9 million at
December 31, 1997, an increase of 386.1%. At December 31, 1997, TeleBank had
approximately $154.0 million in additional borrowing capacity.
At December 31, 1997, the Company had outstanding approximately $31.0
million face amount of Subordinated Debentures. In addition, at the same date,
the Company also had outstanding $10.0 million face amount of the TCT I Junior
Subordinated Debentures and $16.2 million of Preferred Stock. The Company's
aggregate annual interest expense on the Subordinated Debentures and the TCT I
Junior Subordinated Debentures is $4.4 million and the annual dividend payment
on the Preferred Stock is $648,000. Subject to the approval of the OTS and
compliance with federal regulations, TeleBank pays a dividend to the Company
semiannually in an amount equal to the aggregate debt service and dividend
obligations. Under the terms of the indenture pursuant to which the 1994
Subordinated Debentures were issued and the terms of the TCT I Junior
Subordinated Debentures, 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 expense for one year on
both the 1994 Subordinated Debentures and the TCT I Junior Subordinated
Debentures. The Company had $48.6 million in liquid assets at December 31, 1997.
25
<PAGE> 28
CAPITAL
At March 31, 1998, TeleBank was in compliance with all of its regulatory
capital requirements and its capital ratios exceeded the ratios for "well
capitalized" institutions under OTS regulations.
The following table sets forth TeleBank's regulatory capital levels in
relation to the regulatory requirements in effect at the dates specified in the
table. The information below is based upon the Company's understanding of the
regulations and interpretations currently in effect and may be subject to
change.
<TABLE>
<CAPTION>
REQUIRED TO BE
WELL CAPITALIZED
REQUIRED FOR UNDER PROMPT
CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Core Capital (to adjusted tangible assets).......... $31,726 5.08 >$24,999 > 4.0 >$31,248 > 5.0
Tangible Capital (to tangible assets)............... 31,711 5.07 > 9,374 > 1.5 N/A N/A
Tier I Capital (to risk weighted assets)............ 31,726 9.69 N/A N/A > 19,654 > 6.0
Total Capital (to risk weighted assets)............. 34,104 10.41% > 26,205 > 8.0% > 32,756 > 10.0%
As of December 31, 1997:
Core Capital (to adjusted tangible assets).......... $52,617 5.06 >$41,606 > 4.0 >$52,008 > 5.0
Tangible Capital (to tangible assets)............... 52,608 5.06 > 15,602 > 1.5 N/A N/A
Tier I Capital (to risk weighted assets)............ 52,617 11.25 N/A N/A > 28,057 > 6.0
Total Capital (to risk weighted assets)............. 55,701 11.91% > 37,409 > 8.0% > 46,761 > 10.0%
As of March 31, 1998 (Unaudited):
Core Capital (to adjusted tangible assets).......... $54,533 5.48 >$39,783 > 4.0 >$49,728 > 5.0
Tangible Capital (to tangible assets)............... 54,526 5.48 > 14,918 > 1.5 N/A N/A
Tier I Capital (to risk weighted assets)............ 54,533 11.00 N/A N/A > 29,844 > 6.0
Total Capital (to risk weighted assets)............. 57,859 11.60% > 39,792 > 8.0% > 49,739 > 10.0%
</TABLE>
26
<PAGE> 29
RATE/VOLUME TABLE
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 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.
<TABLE>
<CAPTION>
1996 VS. 1995 1997 VS. 1996 MARCH 31, 1998 VS. MARCH 31, 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- --------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------- -------- -------- ------- ------- ------- ------- ------ -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable,
net(1)................. $ 6,333 $ (968) $ 5,365 $12,732 $(1,092) $11,640 $3,060 $(267) $2,793
Mortgage-backed and
related securities..... (9,307) (9,307) (18,614) -- -- -- -- -- --
Investment
securities(2).......... 16 (134) (118) 220 (27) 193 44 (26) 18
Mortgage-backed and
related securities
available-for-sale..... 16,404 (45) 16,359 373 (682) (309) 1,440 (171) 1,269
Investment securities
available-for-sale(3)... 2,194 (305) 1,889 809 8 817 476 31 507
Federal funds sold....... 2 (8) (6) 54 2 56 (10) 4 (6)
Trading account.......... 17 (185) (168) 562 562 1,124 275 274 549
------- -------- -------- ------- ------- ------- ------ ----- ------
Total
interest-earning
assets............. $15,659 $(10,952) $ 4,707 $14,750 $(1,229) $13,521 $5,285 $(155) $5,130
------- -------- -------- ------- ------- ------- ------ ----- ------
Interest-bearing liabilities:
Savings deposits......... $ 2,803 $ (100) $ 2,703 $ 1,111 $ 454 $ 1,565 $ 43 $ 18 $ 61
Time deposits............ 2,208 (596) 1,612 3,315 (279) 3,036 2,567 10 2,577
FHLB advances............ 972 (292) 680 2,400 796 3,196 384 71 455
Other borrowings......... (1,778) (446) (2,224) 2,838 (466) 2,372 1,073 46 1,119
Subordinated debt........ -- 112 112 1,207 (128) 1,079 257 (20) 237
------- -------- -------- ------- ------- ------- ------ ----- ------
Total
interest-bearing
liabilities........ 4,205 (1,322) 2,883 10,871 377 11,248 4,324 125 4,449
------- -------- -------- ------- ------- ------- ------ ----- ------
Change in net interest
income..................... $11,454 $ (9,630) $ 1,824 $ 3,879 $(1,606) $ 2,273 $ 961 $(280) $ 681
======= ======== ======== ======= ======= ======= ====== ===== ======
</TABLE>
- ---------------
(1) Includes mortgage and other loans.
(2) Includes interest-bearing deposits, repurchase agreements, investment
securities held-to-maturity, and FHLB stock.
(3) Interest income and average yields on municipal bonds, included in
investment securities, are presented on a tax equivalent basis.
27
<PAGE> 30
YIELD TABLE
The following table presents certain consolidated balance sheet data,
income and expense and related interest yields and rates at December 31, 1997,
and for each of the preceding three years and for the three months ended March
31, 1998 as set forth 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 is traditionally
used as an indication of the profitability of a savings institution. 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.
<TABLE>
<CAPTION>
MARCH 31,
1996 1997 MARCH 31, 1998
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE 1998 AVERAGE
BALANCE INC./EXP. YIELD/COST BALANCE INC./EXP. YIELD/COST BALANCE BALANCE
-------- --------- ---------- -------- --------- ---------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable,
net................ $279,038 $23,089 8.28% $441,819 $34,729 7.86% $ 557,057 $545,827
Mortgage-backed &
related
securities......... -- -- -- -- -- -- -- --
Investment
securities......... 12,841 871 6.79 16,203 1,064 6.48 38,874 14,859
Mortgage-backed &
related securities,
available for
sale............... 221,656 17,955 8.10 226,064 17,646 7.81 260,152 271,001
Investment
securities,
available for
sale............... 61,169 3,959 6.47 73,649 4,776 6.49 123,963 109,270
Federal funds sold... 842 44 5.22 1,844 100 5.37 -- 951
Trading account...... -- -- -- 12,581 1,124 8.81 42,129 29,672
-------- ------- ------ -------- ------- ------ ---------- --------
Total interest-
earning
assets......... $575,546 $45,918 7.98% $772,160 $59,439 7.70% $1,022,175 $971,580
Non-interest earning
assets................. 26,929 41,465 25,978 27,382
-------- -------- ---------- --------
Total assets..... $602,475 $813,625 $1,048,153 $998,962
======== ======== ========== ========
Interest-bearing
liabilities:
Savings deposits..... $ 99,346 $ 4,815 4.85% $120,901 $ 6,380 5.28% $ 123,435 $123,391
Time deposits........ 258,870 16,542 6.39 311,740 19,578 6.28 437,119 416,702
Brokered callable
certificates of
deposit............ -- -- -- -- -- -- 42,286 22,720
FHLB advances........ 120,678 6,689 5.54 160,681 9,885 6.07 190,000 177,055
Other borrowings..... 68,154 4,569 6.70 117,515 6,941 5.83 153,970 163,059
Subordinated debt,
net................ 17,250 2,200 12.75 27,434 3,279 11.95 29,672 29,944
-------- ------- ------ -------- ------- ------ ---------- --------
Total interest-
bearing
liabilities.... $564,298 $34,815 6.14% $738,271 $46,063 6.21% $ 976,482 $932,871
-------- ------- ------ -------- ------- ------ ---------- --------
Non-interest-bearing
liabilities............ 15,900 25,719 15,605 23,591
-------- -------- ---------- --------
Total
liabilities.... $580,198 $763,990 $ 992,087 $956,462
Trust preferred
securities..... -- 9,597 9,526 --
Total
stockholders'
equity......... 22,277 40,038 46,540 42,500
-------- -------- ---------- --------
Total liabilities and
stockholders' equity... $602,475 $813,625 $1,048,153 $998,962
======== ======== ========== ========
Excess of
interest-earning assets
over interest-bearing
liabilities/
net interest income.... $ 11,248 $11,103 $ 33,889 $13,376 $ 45,693 $ 38,709
======== ======= ======== ======= ========== ========
Net interest spread..... 1.84% 1.49%
====== ======
Net interest
margin(1).............. 1.94% 1.73%
====== ======
Ratio of
interest-earning assets
to interest-bearing
liabilities............ 101.99% 104.59%
====== ======
<CAPTION>
INTEREST AVERAGE
INC./EXP. YIELD/COST
--------- ----------
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest-earning assets:
Loans receivable,
net................ $10,358 7.59%
Mortgage-backed &
related
securities......... -- --
Investment
securities......... 246 6.68
Mortgage-backed &
related securities,
available for
sale............... 5,074 7.49
Investment
securities,
available for
sale............... 1,736 6.35
Federal funds sold... 14 5.82
Trading account...... 549 7.41
------- ------
Total interest-
earning
assets......... $17,977 7.40%
Non-interest earning
assets.................
Total assets.....
Interest-bearing
liabilities:
Savings deposits..... $ 1,629 5.36%
Time deposits........ 6,433 6.26
Brokered callable
certificates of
deposit............ 374 6.67
FHLB advances........ 2,718 6.14
Other borrowings..... 2,385 5.85
Subordinated debt,
net................ 880 11.75
------- ------
Total interest-
bearing
liabilities.... $14,419 6.23%
------- ------
Non-interest-bearing
liabilities............
Total
liabilities....
Trust preferred
securities.....
Total
stockholders'
equity.........
Total liabilities and
stockholders' equity...
Excess of
interest-earning assets
over interest-bearing
liabilities/
net interest income.... $ 3,558
=======
Net interest spread..... 1.17%
======
Net interest
margin(1).............. 1.47%
======
Ratio of
interest-earning assets
to interest-bearing
liabilities............ 104.15%
======
</TABLE>
- ---------------
(1) Net interest margin is the ratio of annualized net interest income to
average interest-earning assets.
28
<PAGE> 31
As a result of the Company's strategy of offering high value savings and
investment products through alternative distribution channels, the Company's
interest rate spread is lower than that of traditional depository institutions.
The Company's interest rate spread was 1.84%, 1.49%, and 1.17% for 1996, 1997,
and the three months ended March 31, 1998, respectively. The Company's net
interest margin on interest-earning assets for such periods was 1.94%, 1.73%,
and 1.47%, respectively.
INTEREST RATE SENSITIVITY MANAGEMENT
The Company actively monitors its net interest rate sensitivity position.
Effective interest rate sensitivity management seeks to ensure that net interest
income and the market value of equity are protected from the impact of changes
in interest rates.
The Company employs an interest rate risk management process that allows
risk-taking within well-defined limits. The Company has implemented a risk
measurement guideline employing "market value of equity" and "gap" methodologies
and other measures. By actively managing the maturities of its interest-
sensitive assets and liabilities, the Company seeks to maintain relatively
consistent net interest spreads and mitigate much of the interest rate risk
associated with such assets and liabilities.
The Company's policy seeks to reduce the variability of the market value of
its equity in a variety of interest rate environments. The Company uses the
concept of fair value of equity (FVE), which represents the net fair value of
the Company's financial assets and liabilities, including off-balance sheet
hedges, and monitors the sensitivity of changes in its FVE with respect to
various interest rate environments. The Company seeks to maximize net interest
income, while limiting changes in the FVE within changing interest rate
environments to prescribed levels deemed acceptable by the Company. The Company
utilizes sensitivity analysis to evaluate the rate and extent of changes to its
FVE in various market environments.
The Company utilizes interest rate swaps, caps, swaptions, floors, collars,
financial options and other mortgage derivative products to reduce the
variability of FVE and its overall interest rate risk exposure. The Boards of
Directors of TeleBanc Financial and TeleBank prohibit the use of the
aforementioned financial instruments for speculative purposes.
The Company also monitors 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.
29
<PAGE> 32
The following table sets forth an interest rate sensitivity analysis for
the Company at March 31, 1998.
<TABLE>
<CAPTION>
REPRICING REPRICING REPRICING
BALANCE AT WITHIN WITHIN WITHIN REPRICING
MARCH 31, PERCENT 0-3 4-12 1-5 MORE THAN
1998 OF TOTAL MONTHS MONTHS YEARS 5 YEARS
---------- -------- ----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net...... $ 557,057 54.50% $ 67,409 $ 176,729 $ 226,467 $ 86,452
Mortgage-backed securities,
available-for-sale and
trading.................. 302,281 29.57 61,891 81,073 83,260 76,057
Investment securities
available for sale,
interest-bearing accounts
and FHLB stock........... 162,837 15.93 72,892 371 46,192 43,382
---------- ------ ----------- --------- --------- --------
Total interest-earning
assets................... 1,022,175 100.00% 202,192 258,173 355,919 205,891
======
Non-interest-earning assets:... 25,978
----------
Total assets............... $1,048,153
==========
Interest-bearing liabilities:
Savings deposits........... $ 123,435 12.64% $ 123,435 $ -- $ -- $ --
Time deposits.............. 479,405 49.09 31,241 158,061 287,413 2,690
FHLB advances.............. 190,000 19.46 180,000 10,000 -- --
Other borrowings........... 153,970 15.77 153,970 -- -- --
Subordinated debt.......... 29,672 3.04 -- -- 29,672 --
---------- ------ ----------- --------- --------- --------
Total interest-bearing
liabilities.............. 976,482 100.00% 488,646 168,061 317,085 2,690
======
Non-interest-bearing
liabilities.................. 15,605
----------
Total liabilities.......... 992,087
Total trust preferred...... 9,526
Stockholders' equity........... 46,540
----------
Total liabilities and
stockholders' equity......... $1,048,153
==========
Periodic repricing difference
(periodic gap)............... $ (286,454) $ 90,112 $ 38,834 $203,201
Cumulative repricing difference
(cumulative gap)............. $ (286,454) $(196,342) $(157,508) $ 45,693
Cumulative gap to total
assets....................... (27.3)% (18.7)% (15.0)% 4.4%
Cumulative gap to total assets
hedge affected(1)............ (6.5)% 2.1% (12.6)% 4.4%
</TABLE>
- ---------------
(1) The hedge effected cumulative gap to total assets includes the effect of
hedging instruments on the Company's gap at March 31, 1998. 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 the market's estimate of the likelihood the cap strike will be
met or exceeded. The estimated net cash flows are used in the gap
calculations.
Shortcomings are inherent in gap analysis because certain assets and
liabilities may not move proportionately as interest rates change. Based on
TeleBank's projected March 31, 1998 simulation analysis, the Company estimates
that a hypothetical instantaneous 100 basis-point rise in rates would cause
TeleBank's FVE to decrease by 8.6%.
30
<PAGE> 33
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation on the Company is different from the impact on an
industrial company because substantially all of the assets and liabilities of
the Company are monetary in nature and interest rates and inflation rates do not
always move in concert. 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. The most direct impact of an extended period of
inflation would be to increase interest rates and to place upward pressure on
the operating expenses of the Company. However, the actual effect of inflation
on the net interest income of the Company would depend on the extent to which
the Company was able to maintain a spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities,
which would depend to a significant extent on its asset-liability sensitivity.
As discussed above, management seeks to manage the relationship between
interest-sensitive assets and liabilities to protect against wide interest rate
fluctuations, including those resulting from inflation. The effect of inflation
on the Company's results of operations for the past three years has been
minimal.
YEAR 2000 ISSUES
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems include various
software packages licensed to the Company by outside vendors and a client server
core processing system both of which are run on in-house computer networks. In
1997, the Company initiated a review and assessment of all hardware and software
to confirm that it will function properly in the year 2000. The Company's core
processing software vendor and the majority of the vendors which have been
contacted have indicated that their hardware and/or software are Year 2000
compliant. Testing will be performed for compliance. Although the Company may
incur additional expenses during the next two years to confirm Year 2000
compliance and to remedy problems, if any, the Company does not anticipate that
such expenditures will be material or that Year 2000 compliance will otherwise
have a material effect on the Company's financial condition or results of
operations. See "Risk Factors -- Year 2000 Compliance."
CHANGES IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" were issued in June 1997. SFAS 130 requires
that certain financial activity typically disclosed in stockholders' equity be
reported in the financial statements as an adjustment to net income in
determining comprehensive income. SFAS 131 requires the reporting of selected
segmented information in quarterly and annual reports. The Company implemented
SFAS No. 130 effective for the first quarter of 1998 and will implement SFAS No.
131 effective for the year ending December 31, 1998. The Company does not
anticipate any material financial impact from the implementation of SFAS Nos.
130 and 131.
31
<PAGE> 34
BUSINESS
OVERVIEW
The Company is a leading national provider of high value savings,
investment and other financial products and services. The Company utilizes a
branchless banking strategy to offer financial products and services to
customers nationwide and to maintain its low cost structure through the use of
alternative delivery channels, such as telephones, the Internet, ATMs, facsimile
and mail. The Company's broad selection of high value savings and investment
products generally have higher interest rates or carry lower fees than similar
products offered by traditional, branch-based financial institutions. The
Company also emphasizes high quality customer service and provides customers
with "anywhere, anytime" convenience for accessing its financial products and
services. The Company intends to broaden its financial products and services to
include in 1998 annuities, residential mortgage loans, credit cards and mutual
funds. At March 31, 1998, the Company had more than 22,000 customer accounts,
$560.6 million in retail deposits and $1.0 billion in assets.
INDUSTRY BACKGROUND
Financial Services
The financial services industry, including depository institutions (such as
banks and savings and loan associations), securities brokerage firms, mutual
fund companies, insurance companies and other financial institutions, is the
fifth largest industry in the United States. In 1997, deposits held in financial
institutions in the United States totaled more than $4 trillion and the total
assets of such institutions were more than $6 trillion, according to the fourth
quarter FDIC Quarterly Banking Profile. Financial institutions earn revenues
principally in the forms of interest income earned on assets and fees or
commissions. In 1997, according to the FDIC Quarterly Banking Profile,
depository institutions recognized more than $203 billion in revenues in the
form of net interest income alone.
The financial services industry is currently experiencing rapid market
change, which is characterized by the demand for alternative delivery channels
for products and services, the emergence of nationwide full-service financial
institutions and growing price competition. Increasingly, customers are seeking
higher value products that offer higher returns or lower fees, as well as access
to financial products and services through anywhere, anytime technology-based
delivery channels, such as the Internet, telephones, ATMs and facsimile. To
compete effectively for customer savings and investment dollars in this
environment, financial institutions have attempted to diversify product lines
and increase access to prospective customers through both the geographic
expansion of traditional branch and office networks and the use of alternative
delivery channels. As a result, customers increasingly are exposed to a wider
selection of products and services that can satisfy their financial demands.
Electronic Commerce
Over the past 30 years, the use of electronic media, such as electronic
data interchanges, private telephone networks, credit cards, ATMs and electronic
bill payment systems, to facilitate commercial functions has become routine.
Over the last several years, the development of network technologies, the growth
of personal computers in the home and workplace and faster and cheaper Internet
access have converged to establish the necessary infrastructure to support
broad-based electronic commerce. The growth of the Internet, in particular, is
evidenced in the significant increase in the number of domain names in recent
years. According to the Commerce Report, from July 1993 to July 1997, the number
of domain names increased from 26,000 to 1,301,000. The Commerce Report also
estimates that traffic on the Internet is doubling every 100 days.
The increasing functionality, accessibility and overall usage of the
Internet has made it an attractive channel for electronic commerce. According to
the Commerce Report, businesses will trade as much as $300 billion annually over
the Internet during the next five years. Currently within the financial services
industry, Internet banking is relatively new and the market for such services is
relatively undeveloped. According to the April 1998 Online Banking Report, only
163 banks in the United States permitted customers to review
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<PAGE> 35
balances, transfer funds and pay bills on the financial institutions' web sites.
Like the rapid proliferation of ATMs in recent years, the growth of online
banking as the newest medium through which banks can offer their customers
remote access to their accounts is significant. According to the Commerce
Report, approximately 4.5 million households were banking online in 1997, and
that number is expected to increase to 10 to 16 million households by the year
2000.
MARKET TRENDS
Demand for Alternative Delivery Channels
The increased use of alternative delivery channels has simplified and
reduced the costs of financial transactions for consumers, businesses and
financial institutions. Instead of conducting financial transactions at branch
offices, customers are increasingly using ATMs, online banking and online bill
payment and electronic fund transfers to communicate with financial services
providers. These remote or electronic financial service delivery mechanisms
offer consumers the ease and convenience of conducting their financial business
anywhere, anytime, whether through their home or office computer, at one of
hundreds of thousands of ATMs located worldwide, or by telephone from wherever
they may be. Documenting this trend, a study by the American Bankers Association
and Ernst & Young LLP has projected that personal computers, ATMs and telephones
will be used for more than half of all customer banking transactions in 1998,
replacing visits to branches as the primary channel for conducting customer
banking transactions.
Development of National Franchises
As a result of technological developments and less restrictive regulations,
financial institutions today are providing financial products and services in a
highly competitive, global market. To gain market share in this environment,
financial institutions are striving to create competitive advantages by
establishing a national market presence, national distribution channels and
national brand identities. Nationwide banks and super-regional banks have
emerged to compete for customer deposits across previously segregated geographic
markets and seek to achieve operating scale efficiencies by operating extensive
branch networks.
One-Stop Shopping for Financial Services
Regulatory changes and cross-sector acquisitions have diminished the
distinctions among various types of financial institutions such as banks,
insurance companies and securities brokerage firms. Financial institutions today
have the capability to leverage their client base, expand their market share and
compete for an increased share of customers' financial services business by
offering a diverse range of products and services that formerly may have been
offered only by one particular type of financial institution. These new
financial services companies seeks to become a "one-stop shop" for customers'
financial needs. For example, securities brokerage firms now offer savings
products similar to deposit accounts offered by depository institutions.
Likewise, depository institutions are offering savings and investment products
that are not insured, such as mutual funds, insurance products and other
financial or investment products. In today's market, these financial
institutions are either increasing their own product offerings internally or
acting as a broker or distributor for financial products provided by other
firms.
Priced-Based Competition
Increasingly, customers are differentiating among financial institutions
based on price and convenience. Generally, today's financial services customers
are well-informed regarding their finances and their options for financial
services. Well-informed customers have caused financial institutions to focus on
lowering the costs to consumers in obtaining financial services. This
development, together with industry deregulation, has increased the
commoditization of financial products and services which, in turn, has
intensified fee competition for those products and services. For example, in the
brokerage services industry, the average online brokerage commission ranged from
$8 to $30 which is substantially less than the average commission of a full
service broker. As a result, online investing accounts are gaining popularity
and the aggregate market value of these accounts is expected to be $524 billion
by 2001 according to a September 1996 report by Forrester Research, Inc.
33
<PAGE> 36
CURRENT SITUATION
As a result of these market trends, financial institutions must compete
nationally for cost-conscious customers who are demanding better value,
increased personal convenience and enhanced service. Traditional financial
institutions have responded to these competitive pressures in large part by
building extensive national and regional branch networks with a significant
physical infrastructure and expanding product offerings. The maintenance of the
physical infrastructure associated with a national or regional branch network is
costly to the financial institution and, in turn, to the customer. For instance,
according to a study by Booz Allen & Hamilton, the cost of the average payment
transaction at a bank branch is $1.07 as compared with the cost of $.01 for a
transaction on the Internet. The geographically-present retail delivery strategy
based on an extensive, costly network of branch offices prohibits traditional
financial institutions from offering the high value financial products needed to
compete for increasingly price-sensitive customers. In this environment,
traditional financial institutions are being increasingly challenged by
financial services innovators, such as electronic securities companies and
Internet-based banks, which capitalize on their low-cost infrastructure to offer
value products that meet customer demands.
THE COMPANY'S SOLUTION
The Company's branchless banking strategy permits the Company to offer high
value financial services and products to customers nationwide and to maintain a
low cost structure through the use of alternative delivery channels, such as the
telephone, the Internet, ATMs, facsimile and mail. The Company also emphasizes
customer service by attentive and knowledgeable employees and convenience for
customers in accessing its financial product offerings. The Company intends to
use these low-cost, scaleable alternative delivery channels to continue to
increase its core deposit base and to market and sell other financial and
investment products, including insurance products, residential mortgage loans,
credit cards and mutual funds.
The Company's solution offers the following benefits to customers:
Broad Selection of High Value Financial Products. The Company believes
that its use of alternative delivery channels permits it to operate nationally,
but with a lower cost structure than many traditional depository institutions.
Such a low cost structure allows the Company to offer a broad selection of "high
value" savings and investment products, which have higher interest rates and
lower fees than traditional, branch-based financial institutions. Building on
its low-cost alternative delivery channels, the Company intends to expand its
product offerings to include credit cards and, through strategic alliances with
third party providers, annuities, residential mortgage loans and mutual funds.
High Quality Service. The Company also capitalizes on its low cost
structure by prioritizing and investing in its customer service. Recognizing
that superior customer service is critical for attracting and retaining
customers, the Company uses its highly trained, primarily college-educated
customer service representatives, known as "TeleBankers," both to sell savings
and investment products and to serve existing customers from the Company's call
center. TeleBankers can access electronically data relating to the customer
accounts and information about additional product requests, which the Company
believes promotes better customer service and offers substantial cross-marketing
opportunities. Based on data generated by the Company's automatic call
distributor system, over the past three months, the average time that an
existing or prospective customer waited to speak with a TeleBanker on the
telephone is approximately 10 seconds. In contrast to many of its competitors,
the Company offers free ATM transactions through the Cirrus network and free
Internet banking to customers.
Convenience. The Company emphasizes anywhere, anytime convenience to
existing and prospective customers by offering several different media through
which a customer can consummate his or her financial transactions or otherwise
communicate with the Company. The Company believes that its alternative delivery
channels permit customers to choose the most convenient method and time to
transact business. For example, customers may open a new account, invest in a
financial product or service or conduct an electronic financial transaction by
telephone (1-800-TELEBANK), through the Internet via the Company's Web site at
www.telebankonline.com, by facsimile or by mail. The Company's customer service
call center operates from 8:00 a.m. to 12:00 a.m. EST/EDT Monday through Friday,
and from 8:00 a.m. to 6:00 p.m. EST/EDT on
34
<PAGE> 37
Saturdays. Customers also can access TeleBank's computer-operated voice response
system 24 hours per day, seven days per week.
THE COMPANY'S STRATEGY
The Company's objective is to be the premier national provider of high
value savings, investment and other financial products, without the overhead and
operating cost infrastructure of traditional financial institutions. To achieve
this objective, the Company has adopted a growth strategy that includes the
following key elements:
Increase TeleBank Brand Visibility Nationally. The Company seeks to build
the "TeleBank" franchise identity based on its high value savings and investment
products, superior customer service and anywhere, anytime convenience. The
Company believes that building the TeleBank brand will increase customer
conversion and retention rates, customer referrals, the number of accounts per
customer and customer receptivity to new products. In pursuing this strategy,
the Company plans to increase significantly its marketing expenditures for the
foreseeable future to implement a targeted, national advertising campaign and
marketing initiative.
Expand Customer Base. The Company seeks to attract new customers to expand
its stable customer and core deposit base by further leveraging its scaleable
alternative delivery channels. The Company intends to continue to employ
targeted marketing techniques designed to attract more profitable customers,
rather than adopting the geographically-based marketing approach often used by
traditional financial institutions. In addition, the Company intends to attract
new customers by establishing additional affinity relationships through
strategic alliances. The Company currently has affinity relationships with 10
organizations with more than one million members in the aggregate. Such
organizations include the National Association of Realtors and the National
Council of Senior Citizens. Additionally, while the Company does not anticipate
many such opportunities, it may pursue selective acquisitions of complementary
financial institutions.
Broaden Product Lines and Increase Cross-Marketing Initiatives. The
Company intends to leverage further its national distribution platforms through
expanded product offerings and increased cross-marketing efforts. The Company
monitors customer inquiries about additional financial products and services and
seeks to provide new product offerings based, in part, on customer requests. The
Company intends to broaden its savings and financial and investment products by
the end of 1998 to offer credit cards and, through strategic alliances,
fixed-rate and variable annuities, residential mortgage loans and mutual funds.
The Company currently has contractual arrangements with several non-affiliated
insurance companies, including USG Annuity & Life Company and Jackson National
Life Insurance Company, through which the Company intends to offer fixed-rate
annuities commencing in 1998, subject to required regulatory approvals and other
contingencies. The Company also intends to offer residential mortgage loans
through E-Loan.
Outsource Non-Core Operations. To maintain its relatively low operating
costs and to capitalize on the technical capabilities of selected vendors, the
Company intends to continue to outsource specific non-core operations and
systems. The Company currently outsources check processing, check imaging,
statement rendering, Internet processing and home page hosting. The Company
generally determines whether to outsource a particular service or operations
based on anticipated cost savings to the Company, while continuing to provide
high quality service to its customers. Companies to which the Company outsources
services or operations include M&I Data Services, Inc. and Security First
Technologies.
Maintain Conservative Asset Strategy. The Company intends to continue its
conservative asset investment strategy of purchasing and managing pools of
one-to-four family residential mortgage loans and investment-grade
mortgage-backed securities. The Company does not currently originate residential
mortgage or other loans. Management believes that purchasing assets, including
residential mortgage loans and mortgage-backed securities, lowers its loan
investment costs and permits the Company to manage the geographic
diversification of its loan portfolio, in an effort to reduce its exposure to
regional economic downturns.
35
<PAGE> 38
PRODUCTS
Through TeleBank, the Company currently offers customers the account
products listed below, all of which are FDIC-insured up to applicable limits.
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION
------------ -----------
<S> <C>
Interest Checking Premium yield NOW account with unlimited free check
writing, free Internet banking, free bill payment
service and ATM/Debit card
Money Market Account Premium yield money market account with immediate
access to funds via checks and ATM card
SmartSaver Savings Account Super premium yield account without term restrictions
Certificates of Deposit Guaranteed premium yields in terms ranging from three
months to five years
Callable Certificates of Deposit Super premium yield CDs, subject to redemption after
two years, with terms ranging from seven to ten years
</TABLE>
The Company also intends to offer the following additional, co-branded
products prior to the end of 1998 pursuant to agreements with third party
providers.
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION
------------ -----------
<S> <C>
Fixed Annuities Line of premium yield flexible and single premium
fixed annuities offering a variety of value-added
features
Variable Annuities Line of variable annuities with value-added features
including low expense structure and no surrender
charges
Residential Mortgage Loans Competitively priced selection of residential mortgage
loans
Credit Cards Credit cards offering low rates, Internet statement
presentation and RateReward program tying usage to
bonus savings rates on TeleBank deposit products
Mutual Funds No load mutual funds and discount brokerage services
</TABLE>
FDIC-Insured Account Products
TeleBank currently offers a full spectrum of premium yield FDIC-insured
transaction and time deposit products designed to attract customers who are
seeking high interest rates and low fees.
Interest Checking. TeleBank's Interest Checking is designed for customers
who are seeking a premium yield checking account and certain additional
benefits, including unlimited personal check writing, free check printing, free
Internet banking, free unlimited bill paying via personal computer and an
ATM/debit card. At June 10, 1998, Interest Checking customers earned 3.15%
annual percentage yield ("apy") for balances of $2,500 to $9,999, 3.95% apy for
balances of $10,000 to $24,999 and 4.65% apy for balances $25,000 or more.
36
<PAGE> 39
Money Market and SmartSaver Accounts. TeleBank's Money Market and
SmartSaver Accounts are designed for consumers who are seeking premium and super
premium yields with immediate access to funds and without term restrictions or
early withdrawal penalties. At June 10, 1998, Money Market Account customers
earned 5.00% apy for a minimum balance of $2,500, and SmartSaver Account
customers earned 5.35% apy for a minimum balance of $2,500.
Certificates of Deposit. TeleBank CDs are designed for consumers who want
a fixed premium yield for terms ranging from three months to five years. For
those consumers who seek an even higher premium yield CD, TeleBank offers seven-
to ten- year callable CDs which are subject to redemption by TeleBank anytime
after two years. At June 10, 1998, CD rates ranged from 5.61% apy for a
three-month CD to 6.85% apy for a ten-year callable CD.
The following table compares the rates on TeleBank's FDIC-insured account
products to similar account products offered by other depository institutions.
COMPARISON OF PRODUCT RATES
AS OF JUNE 10, 1998(1)
<TABLE>
<CAPTION>
NATIONAL
TELEBANK AVERAGE
RATE(2) RATE(2)
-------- --------
<S> <C> <C>
Interest Checking........................................... 3.15% 1.49%
Money Market Checking....................................... 5.00% 2.53%
Money Market Savings........................................ 5.35% 3.00%
One year Certificate of Deposit............................. 5.85% 5.13%
Five year Certificate of Deposit............................ 6.17% 5.42%
</TABLE>
- ---------------
(1) Source: Bank Rate Monitor, June 16, 1998.
(2) Represents annual percentage yield on the account.
Investment and Other Financial Products
During 1998, the Company intends to introduce the additional investment and
other financial products described below which, in contrast to its FDIC-insured
account products, would be expected to generate sales fees and commissions.
Annuity Products. The Company's wholly owned subsidiary, TeleBanc
Insurance, a licensed insurance agency, is expected to offer co-branded products
to attract customers who are seeking fixed or variable annuities with
value-added features. The Company has entered into agreements with several
nationally recognized insurance companies, including USG Annuity & Life Company,
Jackson National Life Insurance Company and First Penn-Pacific Life Insurance
Company, through which the Company will offer co-branded insurance products to
its existing and new customers at commissions that are expected to be
significantly less than the average commission generated by traditional
insurance agencies. The Company intends to design these products to have a
higher value than products available through traditional channels of
distribution.
Through TeleBanc Insurance, the Company intends to offer a selection of
high value fixed annuity products, with interest rates in the range of 50 to 100
basis points above the interest rates on full commission products. These
products are expected to provide customers with multiple year guarantees,
cumulative free withdrawals, introductory year bonus rates and no surrender
charges. Also through TeleBanc Insurance, the Company intends to offer a
selection of variable annuity products, which will provide customers with no
surrender charges, low expense ratios and extensive mutual fund selections. The
Company currently expects
37
<PAGE> 40
that its fixed annuity products will be available by the summer of 1998 and its
variable annuity products will be available by the fall of 1998.
Residential Mortgage Loans. The Company has entered into a strategic
alliance with E-Loan, an online mortgage broker, to offer to the Company's
customers co-branded, rate-competitive residential mortgage loans, and to offer
to E-Loan's customers the Company's financial products and services. The
Company, however, does not intend to originate such loans.
Credit Cards. Responding to customer requests and to expand further its
affinity relationships, the Company intends to offer credit cards to its
customers. Such credit cards are expected to have value-added features such as
low fee or no fee if certain transaction minimums are maintained, lower interest
rates and additional purchasing initiatives. As a result of the DFC Acquisition,
which is expected to occur in the summer of 1998, TeleBank, will have the
capability to offer its customers credit cards.
Mutual Funds. The Company has entered into a letter agreement with E*Trade
pursuant to which the Company intends to make available to TeleBank customers
the products and services offered by E*Trade, including electronic brokerage
services, value-added mutual funds and discount brokerage services through
alternative delivery channels.
Other Financial Products. The Company is also exploring strategic
alliances with select insurance companies to offer high value term life
insurance and automobile insurance products.
Although the Company currently intends to offer the above-described
products and services within the time periods indicated, if any, its ability to
offer such products and services is subject to numerous factors, many of which
are beyond the Company's control. In addition, based on its analysis of the
feasibility and profitability of such products and services, the Company (i) may
determine not to offer all or certain of such new products and services, (ii)
may significantly delay the time at which it introduces such new products and
services, or (iii) may determine to withdraw such products and services shortly
after their introduction based on management's assessment of certain factors,
including customer acceptance and costs. Accordingly, there can be no assurance
that the Company will actually introduce and offer all or any of the
above-described products and services within the time periods indicated or at
all, or that, if offered, such products and services will be profitable for the
Company. See "Risk Factors -- Dependence on New Products and Services."
CUSTOMER SERVICE AND CONVENIENCE
The Company believes that high quality customer service is critical to
attract and retain customers. Accordingly, the Company employs customer service
representatives, known as "TeleBankers," who are highly trained, primarily
college-educated, professionals who seek to satisfy customers' demands. When a
customer calls the Company, a TeleBanker can access electronically data relating
to the customer, his or her existing accounts, as well as information about
additional product requests. Based on data gathered by the Company's automatic
call distributor system, during May 1998, the average customer call to the
Company was answered in person by a TeleBanker within 10 seconds of receipt of
the call, and calls to the Company had a rate of abandonment by customers before
a TeleBanker could speak with the customer of less than 3%. The TeleBankers also
have access electronically to information about TeleBank's other savings and
investment products, which permits them not only to respond fully to customers'
questions and to assist with transactions, but also to cross-market the
Company's other savings and investment products.
The Company seeks to promote employee loyalty and high quality customer
service through a compensation package that is different from that of the
typical teller in a traditional depository institution. TeleBankers are
compensated through an annual salary, a year-end performance-based bonus that is
based on both the Company's and the employee's performances, monthly incentive
programs and an employee stock ownership plan in which every full-time employee
participates.
Currently, TeleBank's customers can access TeleBankers from Monday through
Saturday by calling 1-800-TELEBANK from 8:00 a.m. to 12:00 a.m. EST/EDT Monday
through Friday, and 8:00 a.m. to 6:00 p.m. EST/EDT on Saturdays. The Company
plans to extend these hours by routing calls to an overflow call center during
non-business hours. Customers also can access certain information or make
transactions on
38
<PAGE> 41
their own accounts 24 hours per day, seven days per week via the Internet and a
computer-operated voice-response system.
The Company believes that customers are seeking not only high value savings
and investment products, but also prompt, easy and convenient access to their
accounts. As a result, building on its alternative electronic and
technology-based communication channels, the Company seeks to attract customers
by offering a variety of remote media to access accounts and information and to
serve its nationwide customer base. As illustrated below, the Company currently
offers customers six different ways to access accounts and information:
[Graphic: TeleBank logo surrounded by words describing different ways to
communicate with TeleBank, such as ATM, telephone, facsimile, Internet and
ATM/Debit cards.]
TARGET CUSTOMERS
The Company has customers in all 50 states, the District of Columbia and
many foreign countries. The Company believes that several key demographic trends
in the United States will contribute to significant growth in the market for
savings and investment products. Such trends include an aging population,
increased mobility and affluence, the rise in nontraditional and small
households and increasing dissatisfaction with substantially larger branch-based
financial institutions. The Company's customers include individuals of all
different age groups and an increasing number of small businesses. Based on
information complied by CACI Marketing Systems, an independent market research
company, and on information compiled by the Company, the Company believes that
the typical TeleBank customer is approximately 50 years old, owns his or her own
home, is married, has a household income of $50,000 and maintains 1.8 accounts
with an average deposit of $24,000 per account.
The Company believes that its high value products and alternative
distribution channels appeal to both younger, more transaction-oriented savers
who seek high rates, convenience and service, and older, longer-term savers who
choose term savings products. The Company believes that its savings and
investment products appeal to younger individuals with full-time careers who
manage their cash reserves through the use of TeleBank's Money Market and
SmartSaver accounts. These customers value the higher yields that TeleBank pays
and tend to utilize the telephone or the Internet to access accounts at
convenient opportunities. The Company believes such demographic groups will also
be receptive to new product and service offerings such as Internet checking,
variable annuities and mutual funds. Company customers close to or at retirement
age tend to hold their liquid assets in TeleBank savings accounts and invest
their long term savings in TeleBank's CD products. The Company's fixed annuity
products are being developed to meet the investment needs of this particular
group.
MARKETING
The Company has developed a multiple channel, consumer-oriented direct
marketing model designed to reach potential customers and build brand awareness
nationally. Based upon demographics and current regional banking conditions, the
Company targets key consumer markets through a variety of advertising and
promotional media, including print advertising in national periodicals, local
newspapers and specialty publications; Internet advertising; national radio
advertising predominately on talk/news stations; direct mail campaigns; public
relations; and affinity marketing programs. To fund its marketing activities,
the Company
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increased its marketing budget to $1.8 million in 1997 from $930,000 in 1996 and
has substantially increased its marketing budget for 1998.
In addition to its national advertising, the Company undertakes more
concentrated advertising campaigns on a regional basis, utilizing print, radio
and billboards to build further brand awareness and target less rate-sensitive
consumers. As these regional campaigns penetrate each market, management plans
to combine them into a unified, national campaign. As part of these efforts, the
Company intends to establish, on a test basis, low-cost, small regional business
development offices to coordinate marketing activities and asset acquisition
activities in a geographic region. The Company currently has a small regional
business development office in Los Angeles. Management believes that such
offices will increase customer response rates and sales of products to new and
existing customers in the regions in which such offices are located, while
maintaining the Company's low-cost operating structure.
Customer Incentive Programs
In addition to the Company's traditional advertising methods, the Company
employs the following programs designed to leverage its existing account base to
sell additional products and services and attract new customers.
Refer-A-Saver. In 1995, TeleBank introduced its Refer-a-Saver program,
pursuant to which it pays cash to existing customers who refer new customers to
TeleBank. This program, which lowers the marketing cost associated with each new
customer by approximately two-thirds, is responsible for nearly 10% of all new
customers.
Preferred Saver. As an incentive to maintain multiple accounts with
TeleBank, TeleBank offers lower minimum balances and higher rates on select
products for customers with multiple accounts through its Preferred Saver
program. Currently, approximately 30% of TeleBank's customers are enrolled in
this program. Multiple account holders are more profitable for TeleBank because
the marketing expense per dollar deposited by such customers is lower than that
for new accounts, the cost of funds per depositor is lower and customer loyalty
and franchise value are increased.
Affinity Programs
The Company's affinity marketing efforts are designed to reach targeted
groups of consumers with the endorsement of their membership organization. In
1996, TeleBank started its PartnersPlus Affinity program by contracting with
professional and other organizations to promote the Company's savings and
investment products. The Company believes that such programs increase customer
conversion rates as a result of the association's third party endorsement.
Currently, TeleBank has affinity programs with 10 organizations, with a total of
more than one million members, and is currently exploring possible affinity
programs with several additional organizations comprising more than five million
members. The current PartnersPlus Affinity program participants include the
National Association of Realtors, the Association of Women's Health, Obstetric
and Neonatal Nurses and the National Council of Senior Citizens.
STRATEGIC ALLIANCES
The Company continually seeks to complement current value-based product
selection by forming strategic alliances with established third party financial
service providers to develop and market new products and services. In addition,
the Company gains new distribution channels by offering its own product line
through consumer networks of its alliance participants. For example, the Company
has established strategic alliances with USG Annuity & Life Company and Jackson
National Life Insurance Company to provide annuities through TeleDirect and with
E-Loan to provide residential mortgage loans. The Company has also entered into
a strategic alliance with E*Trade through which the Company and E* Trade intend
to co-market each other's financial products and services to new or existing
customers. The Company's marketing strategy also includes joint marketing
initiatives that highlight the Company's alternative delivery platforms. For
instance, the Company believes that an alliance with a Web search engine to
offer the Company's products and services to targeted groups of customers
through the search engine's home page would be an effective
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<PAGE> 43
platform through which to market the Company's products and services, as well as
its alternative delivery channels. By expanding its product line and its
Internet accessibility, the Company seeks to leverage its existing customer base
to cross-sell these new products and services, thereby capturing such benefits
as lower customer acquisition costs and higher profit margins.
MODEL TRANSACTIONS
The following are descriptions of model transactions designed to illustrate
the implementation of the Company's strategy and the mechanics of a transaction
for a current or prospective customer.
Accessing TeleBank Through Multiple Remote Channels
A TeleBank customer accesses her accounts by going to the Internet banking
page on TeleBank's Web site and typing in her secure access codes. The customer
checks account balances and transfers funds to her checking account from her
savings account, and pays some bills while logged onto TeleBank's Internet
banking system by using the bill paying function. The next day, the customer
withdraws cash from her checking account from an ATM in the Cirrus network and
confirms that funds wire transferred to the customer's TeleBank account have
been received. The customer is not charged a transaction fee by TeleBank. Later,
she telephones the Company's call center and receives confirmation from a
TeleBanker that funds wire transferred to the customer's TeleBank account have
been received.
Attracting New Customers Through PartnerPlus Affinity Program
Members of the 10 organizations which participate in TeleBank's PartnerPlus
Affinity program, such as the National Association of Realtors, receive
newsletters or other communications from such organizations that include
information regarding the financial products and services that TeleBank offers
to such members. These communications alert members that they are eligible for
the special products that TeleBank has customized for their organization. For
example, members of a participant of a PartnerPlus Affinity program may be
offered interest rates on accounts maintained with TeleBank that are higher than
the rates offered to the general public, may have a separate toll-free telephone
number to reach TeleBankers for member accounts and may be offered lower fees on
specific products. The member, after reading the information in the
organization's communications, calls a TeleBanker that evening to purchase a
one-year CD because it offers a higher rate of interest than that offered by the
customer's current depository institution.
Cross-Selling Additional Value-Added Products
A prospective customer interested in the rates available on the SmartSaver
account calls TeleBank after hearing a Company radio promotion. The TeleBanker
advises the customer that she would earn a higher interest rate if she
transferred her savings account to TeleBank. The TeleBanker also mentions to the
prospective customer that TeleBank offers competitive CD rates, and the customer
requests additional information on the CD products as well as an application kit
for the SmartSaver account. During a customer service call a few months after
the customer has established accounts at TeleBank, another TeleBanker notes from
the Company's electronic database that the customer had inquired about savings
products, and informs her that the Company is now offering a fixed rate annuity
that may satisfy the customer's demands. At her request, the TeleBanker
transfers the customer to an insurance-licensed service representative in a
separate call center for the non-FDIC insured products offered by the Company.
This customer service representative informs the customer about the features of
the annuity and arranges for her to receive information regarding the fixed rate
annuity product offerings. Upon receiving the information, the customer
completes and mails the application and invests in a co-branded, fixed rate
annuity from the Company through an automatic debit from the customer's checking
account.
Certain products, such as fixed rate annuities, are not currently offered
by the Company. Although the Company intends to offer such products in 1998, its
ability to do so is subject to numerous factors, many of which are beyond the
Company's control. Accordingly, there can be no assurance that the Company will
actually introduce and offer such products within the time periods indicated, or
at all. See "-- Products."
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ASSET ACQUISITION STRATEGY
The Company's asset acquisition strategy is focused on investing in
one-to-four unit, single-family mortgage loans and mortgage-backed securities
purchased in the secondary market, rather than originating loans. By purchasing
rather than originating mortgage loans, the Company eliminates some of the
expenses associated with the loan origination function. At March 31, 1998, the
Company's residential mortgage assets represented 81.3% of the Company's total
interest-earning assets. The Company also believes that, by purchasing a
seasoned and geographically diverse portfolio, it is better able to manage
credit quality risk. 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 to operate
profitably in various interest rate environments. In addition to retail
deposits, the Company's funding sources include borrowings from the FHLB,
securities sold under agreements to repurchase and subordinated debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.
COMPETITION
The financial services industry in the United States is highly competitive
and characterized currently by rapid change. The Company competes throughout the
United States with other savings banks, savings and loan associations,
commercial banks, credit unions, brokerage firms, mutual funds, insurance
companies and other financial institutions. The Company's competitors include
traditional financial institutions that operate on a nationwide scale, regional
financial institutions, brokerage firms such as Charles Schwab & Co., Inc. and
Merrill Lynch & Co., and Internet-based financial institutions such as Net.B@nk.
As the Company expands its products and services, it expects to face increased
competition from additional sources, including insurance brokers and mortgage
bankers. Many of the financial institutions and other companies with which the
Company currently competes or may compete in the future have significantly
greater capital and management resources than does the Company.
The Company believes that customers choose financial products and services
primarily on the basis of price, service, convenience and product quality. The
Company believes that it attracts and retains customers primarily because of its
high value savings and investment products which offer a higher interest rate or
lower fee than the products offered by many of its competitors, the convenience
of its alternative delivery channels and its high quality customer service.
Because the Company purchases rather than originates residential mortgage
loans and mortgage-backed securities, the Company's competitors for such
investments are primarily commercial banks, savings banks, mortgage brokers,
pension funds, real estate investment trusts and other financial service
providers that purchase mortgage-related products. The Company believes that the
secondary market for residential mortgage loans is large and relatively fluid,
with pricing typically a function of supply and demand and general market
conditions. As to such investments, the Company competes principally on the
basis of bid price. The Company believes that it is able to compete effectively
for mortgage loans and mortgage-backed securities primarily because of its
relatively low cost infrastructure. See "Risk Factors -- Competition."
GOVERNMENT REGULATION
General. TeleBanc Financial, as a savings and loan holding company, and
TeleBank, as a federally chartered savings bank, are subject to extensive
regulation, supervision and examination by the OTS as their primary federal
regulator. TeleBank also is subject to regulation, supervision and examination
by the FDIC and as to certain matters by the Federal Reserve Board. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Note 3 of the Notes to Consolidated Financial Statements of the
Company as to the effect of certain laws, rules and regulations on the
operations of the Company and TeleBank. Set forth below is a description of
certain key aspects of these regulatory requirements and of certain recent
regulatory developments.
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Thrift Charter Legislation. In September 1996, legislation (the "1996
Legislation") was enacted to address the undercapitalization of SAIF, of which
TeleBank 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. TeleBank 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, TeleBank's
deposit insurance premiums to the SAIF were reduced as of September 30, 1996.
TeleBank expects that its future deposit insurance premiums will continue to be
lower than the premiums it paid prior to the SAIF recapitalization.
The 1996 Legislation requires the merger of the Bank Insurance Fund and
SAIF into a single deposit insurance fund on January 1, 1999, but only if the
thrift charter is eliminated by that date. Congress has been considering various
forms of financial modernization legislation some of which would have required a
federally chartered savings bank, such as TeleBank, to convert its charter to a
national or state bank charter. However, the House of Representatives passed a
financial modernization bill on May 13, 1998, that would not require TeleBank to
convert its charter. Nevertheless, if legislation ultimately were to be enacted
that required TeleBank to convert its charter, the Company would become a bank
holding company subject to Federal Reserve Board regulation.
In the absence of appropriate "grandfather" provisions, such legislation
could have an adverse effect on TeleBank and the Company. Such legislation
could, for example, subject the Company to regulatory capital requirements for
the first time and place limitations on the type of business activities it can
conduct, although the Company's current activities would remain permissible
under the legislation considered by the United States Congress to date. The
Company is unable to predict whether, and in what form, any such legislation is
likely to be enacted and the effect such legislation might have on the Company
and TeleBank.
Regulatory Capital Levels of TeleBank. As a federal savings bank, TeleBank
is subject to minimum capital requirements prescribed by federal statute and OTS
regulations. At March 31, 1998, TeleBank's tangible, core, tier 1 risk-based and
total risk-based regulatory capital ratios were 5.5%, 5.5%, 11.0%, and 11.6%,
respectively. TeleBank's capital ratios exceeded the requirements under FIRREA
as well as the standards established for "well capitalized" institutions under
the prompt corrective action regulations established pursuant to FDICIA.
FDICIA requires OTS to take "prompt corrective action" with respect to
savings associations that do not meet minimum capital requirements. The OTS's
prompt corrective action regulation establishes five capital categories for
thrift institutions: well capitalized, adequately capitalized, undercapitalized,
severely undercapitalized and critically undercapitalized. The OTS has the
discretion under the prompt corrective action regulations to reclassify an
institution from one category to the next lower category, for example, from
"well capitalized" to "adequately capitalized," if, after notice and an
opportunity for a hearing, the OTS determines that the institution is in an
unsafe or unsound condition or has received and has not corrected a less than
satisfactory examination rating for asset quality, management, earnings or
liquidity.
The OTS has indefinitely delayed implementation of an interest-rate risk
component of its risk-based capital regulation pending the testing of an OTS
appeals process. Under that component, an institution that would experience a
change in "portfolio equity" in an amount in excess of 2.0% of the institution's
assets as a result of a 200 basis point increase or decrease in the general
level of interest rates would be required to maintain additional amounts of
risk-based capital based on the lowest interest rate exposure at the end of the
three previous quarters. At March 31, 1998, TeleBank would not have been
required to maintain additional amounts of risk-based capital had the
interest-rate risk component of the capital regulations been in effect.
If TeleBank were to become "undercapitalized" under the prompt corrective
action regulations, it would be required by statute to file a capital
restoration plan with the OTS setting forth, among other things, the steps
TeleBank would take to become "adequately capitalized." The OTS could refuse to
accept the plan unless TeleBanc Financial guaranteed in writing TeleBank's
compliance with the plan. The aggregate liability of TeleBanc Financial under
such a commitment would be limited to the lesser of (i) an amount equal to 5.0%
of TeleBank's total assets at the time that TeleBank became "undercapitalized"
and (ii) the amount necessary to bring TeleBank into compliance with all
applicable capital standards as of the time that TeleBank
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fails to comply with its capital plan. If TeleBanc Financial refused to provide
the guarantee, TeleBank would be subject to the more restrictive supervisory
actions applicable to "significantly undercapitalized" institutions. Moreover,
if TeleBank were to become "critically undercapitalized" (which is defined to
include institutions that still have a positive net worth) it would be subject
to the appointment of a receiver or conservator.
TeleBank's ability to maintain or increase its capital levels in future
periods will be subject, among other things, to general economic conditions. As
a result, although TeleBank's regulatory capital ratios at March 31, 1998 met
the ratios established for "well capitalized" institutions, there can be no
assurance that TeleBank will be able to maintain levels of capital sufficient to
continue to meet the standards for classification as "well capitalized" under
the prompt corrective action standards.
Qualified Thrift Lender Requirement. For TeleBank to exercise the powers
granted to federally chartered savings institutions and maintain full access to
FHLB advances, it must constitute a qualified thrift lender ("QTL"). A savings
association will constitute a QTL if its qualified thrift investments continue
to equal or exceed 65% of its portfolio assets on a monthly average basis in
nine out of every 12 months. At March 31, 1998, TeleBank's qualified thrift
investments constituted 85.75% of portfolio assets, and TeleBank has been in
compliance with this requirement for at least nine out of the prior 12 months.
Qualified thrift investments generally consist of various housing related
loans and investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans and mortgage-backed
securities), small business loans, credit card and educational loans, and shares
of stock issued by any FHLB, the Federal Home Loan Mortgage Corporation or the
Federal National Mortgage Association. In addition, the following assets may be
categorized as qualified thrift investments in an amount not to exceed 20% of
the savings association's aggregate portfolio assets: (i) 50% of the dollar
amount of residential mortgage loans originated and sold within 90 days of
origination; (ii) investments in securities of a service corporation that
derives at least 80% of its income from residential housing finance; (iii) 200%
of loans and investments made to acquire, develop or construct starter homes or
homes in credit needy areas (subject to certain conditions); (iv) 200% of loans
for the purchase or construction of churches, schools, community service
facilities, nursing homes and hospitals in credit needy areas; and (v) consumer
loans (other than credit card and education loans). For purposes of the QTL
test, the term "portfolio assets" means the savings association's total assets
minus goodwill and other intangible assets, the value of property used by the
savings association to conduct its business, and liquid assets held by the
savings association in an amount up to 20% of its total assets.
A savings association that fails to constitute a QTL must limit its future
investments and activities (including branch development and payments of
dividends) to those permitted for both savings associations and national banks.
Additionally, any such savings association will be ineligible to receive further
FHLB advances and, beginning three years after the loss of QTL status, will be
required to repay outstanding FHLB advances and dispose of, or discontinue, any
pre-existing investment or activities not permitted for both savings
associations and national banks. Finally, within one year of the loss of QTL
status, the holding company of a savings association must register as a bank
holding company and will be subject to all statutes applicable to bank holding
companies, including capital requirements. While the restrictions on the
investments and activities of TeleBank and the Company that would be imposed if
TeleBank were to fail the QTL test should not have a material adverse effect on
the Company or TeleBank based on their current operations, the loss of FHLB
advances could adversely affect TeleBank's liquidity.
Restrictions on Brokered Deposits. A depository institution that is not
"well capitalized" under OTS prompt correction action regulations is prohibited
from accepting or renewing deposits through a deposit broker or offering rates
of interest on insured deposits that are "significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions in such depository institution's normal market area" unless a
waiver is received from the FDIC. Institutions that receive a waiver from the
FDIC are nevertheless subject to limits on the rates of interest they may pay on
such deposits. In January 1998, TeleBank began to use brokers to acquire CDs
that contain call features. At March 31, 1998, TeleBank had approximately $42.3
million in deposits obtained through such brokers in the form of callable CDs.
If TeleBank failed to remain well capitalized under the prompt corrective action
regulations, it would no longer
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be permitted to sell callable CDs through a broker, and the regulatory
restrictions on deposit interest rates that could be paid on deposits could
adversely affect TeleBank's operations in light of TeleBank's strategy of
offering premium yield deposits.
Community Reinvestment Act. As an FDIC-insured savings association,
TeleBank is subject to the Community Reinvestment Act of 1977 ("CRA"), under
which it has a continuing and affirmative obligation to help meet the credit
needs of its local communities, including low- and moderate-income neighborhoods
(i.e., its assessment area). In addition, the OTS is required under the CRA to
take into account TeleBank's CRA record in determining whether to approve
various applications. As a result of TeleBank's non-traditional operating plan,
specifically its nationwide operations and its lack of direct lending
activities, there is considerable uncertainty as to how to evaluate TeleBank's
CRA performance. Currently, TeleBank has designated Arlington County, Virginia
as its "assessment area" and is evaluated on the basis of its acquisition of
residential mortgage loans secured by property located in this area. Based on an
OTS examination dated as of February 18, 1997, TeleBank was rated "satisfactory"
for CRA purposes. TeleBank has requested that OTS designate it a "wholesale"
institution under recent revisions to CRA regulations. Such a designation would
provide the OTS with greater flexibility in reviewing TeleBank's CRA record,
including permitting TeleBank to define a broader assessment area and giving
greater emphasis to services provided by TeleBank to low- and moderate-income
areas.
Sources of Funds for Cash Dividends. TeleBanc Financial has traditionally
invested substantially all of its available liquid assets in TeleBank. The
ability of TeleBanc Financial to pay dividends and its liquidity are primarily
derived from, and dependent on, TeleBank's ability to pay dividends to TeleBanc
Financial. In general, TeleBank pays dividends to TeleBanc Financial only to the
extent that funds are needed to cover operating expenses, to service the debt of
TeleBanc Financial and to pay dividends to preferred stockholders. In addition,
TeleBank's ability to pay dividends on its common stock is subject to certain
restrictions. TeleBanc Financial does not currently intend to contribute all of
the net proceeds of the Offering to TeleBank. Any restrictions on TeleBank's
payment of dividends could adversely affect the ability of TeleBanc Financial to
make payments on its debt and pay dividends on any outstanding preferred stock,
which could in turn adversely affect its stockholders. See "Use of Proceeds."
The OTS prompt corrective action regulation prohibits thrift institutions,
such as TeleBank, from making "capital distributions" (defined to include a cash
distribution or a stock redemption, but excluding dividends in the form of
additional shares of capital stock) unless the institution is at least
"adequately capitalized." Currently, an institution is considered "adequately
capitalized" for this purpose if it has a leverage (or core capital) ratio of at
least 4.0%, a tier 1 risk-based capital ratio of at least 4.0%, and a total
risk-based capital ratio of at least 8.0%. At March 31, 1998, TeleBank's
leverage, tier 1 risk-based and total risk-based capital ratios of 5.5%, 11.0%,
and 11.6%, respectively, met the ratios established for "well capitalized"
institutions and, thus, exceeded the ratios established for "adequately
capitalized" institutions.
Under the current OTS capital distribution regulation, as long as TeleBank
meets the OTS capital requirements before and after the payment of dividends, it
may pay out dividends without prior OTS approval equal to the higher of (i) 100%
of net income to date over the calendar year and 50% of surplus capital existing
at the beginning of the calendar year or (ii) 75% of its net income over the
most recent four-quarter period. The OTS could require prior approval if it were
to determine that TeleBank was "in need of more than normal supervision." In
addition, the OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds, and must be given
30 days' advance notice of all capital distributions, during which time it may
object to any proposed distribution.
Recently proposed revisions to the OTS capital distribution regulation
would conform the definition of "capital distribution" to the definition used in
the OTS prompt corrective action regulations. Under the proposal, TeleBank would
continue to be required to provide a notice to OTS 30 days prior to the
declaration of a dividend. The proposal would not impose a quantitative
limitation on the amount of permissible capital distributions, but the OTS could
disapprove a capital distribution if the institution would not be at least
adequately capitalized under the OTS prompt correction action regulation
following the distribution, if the distribution raised safety or soundness
concerns, or if the distribution violated a prohibition contained in any
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<PAGE> 48
statute, regulation, or agreement between the institution and the OTS, or a
condition imposed on the institution by the OTS. The OTS would consider the
amount of the distribution when determining whether it raised safety or
soundness concerns.
Interest on Deposits. Various proposals have been introduced in the
Congress to permit the payment of interest on required reserve balances, and to
permit savings institutions and other regulated financial institutions to pay
interest on business demand accounts. While this legislation appears to have
strong support from many constituencies, the Company is unable to predict
whether such legislation will be enacted.
Other Regulatory Proposals. During 1997 and 1998, the OTS continued its
comprehensive review of its regulations to eliminate duplicative, unduly
burdensome and unnecessary regulations. The OTS revised or has proposed revising
regulations addressing electronic banking operations, deposit accounts,
application processing and management of interest rate risk, investment
securities and derivatives activities. The proposal on electronic banking
operations would expand the services that TeleBank can provide electronically by
permitting savings institutions to engage in any activity through electronic
means that they may conduct through more traditional delivery mechanisms,
including opening new deposit accounts and the establishment of loan accounts.
The proposal also would allow savings institutions to market and sell electronic
capacities and by-products to third parties if the capacities and by-products
are acquired or developed in good faith as part of providing financial services.
Liquidity Requirements. Recently adopted revisions to the OTS liquidity
requirements lowered the minimum liquidity requirement for a federal savings
institution from 5% to 4%, but made clear that an institution must maintain
sufficient liquidity to ensure its safe and sound operation. The revisions also
added certain mortgage-related securities and residential mortgage loans to the
types of assets that can be used to meet liquidity requirements, and provided
alternatives for measuring compliance with the requirements.
ATM Surcharge Legislation. Various proposals have been introduced in
Congress to restrict or prohibit an operator of an ATM from requiring
non-customers to pay surcharges to use that operator's ATM. The Company is
unable to predict at this time whether such legislation will be enacted.
EMPLOYEES
At May 31, 1998, the Company had 67 full-time employees, and 16 part time
employees. Management considers its relations with its employees to be
excellent. The Company's employees are not represented by any collective
bargaining group.
PROPERTIES
The Company leases its principal office located at 1111 North Highland
Street, Arlington, Virginia. The Company leases approximately 19,000 square feet
in that location. The lease expires in 2005. Beginning in March 1998, the
Company leased approximately 1,500 square feet of office space in Los Angeles,
California as a small business development office. The Company believes that its
facilities are adequate for its current operations.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table lists the current directors, executive officers and
certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David A. Smilow....................... 36 Chairman of the Board of Directors
Mitchell H. Caplan.................... 40 Vice Chairman of the Board of
Directors, Chief Executive Officer and
President
Aileen Lopez Pugh..................... 30 Executive Vice President, Chief
Financial Officer
Laurence Greenberg.................... 36 Executive Vice President, Chief
Marketing Officer
Michael Opsahl........................ 35 Executive Vice President, Chief Credit
Officer
Sang-Hee Yi........................... 34 Executive Vice President, Chief
Operating Officer
David R. DeCamp....................... 39 Director
Arlen W. Gelbard...................... 40 Director
Dean C. Kehler........................ 41 Director
Steven F. Piaker...................... 35 Director
Mark Rollinson........................ 62 Director
</TABLE>
David A. Smilow has served as the Chairman of the Board of Directors since
March 1994 and as Chief Executive Officer of TeleBanc Financial from March 1994
to April 1998. He has also served as the Chairman of the Board of Directors of
TeleBank since January 1994 and as Chief Risk Management Officer of TeleBank
since February 1996. Prior to January 1994, Mr. Smilow served as President of
TeleBank. Mr. Smilow also serves as President of TCM. Mr. Smilow is the
brother-in-law of Mr. Opsahl.
Mitchell H. Caplan has served as the Vice Chairman of the Board of
Directors and President of TeleBanc Financial since January 1994 and has served
as Chief Executive Officer of TeleBanc Financial since April 1998. Mr. Caplan
has also served as Vice Chairman, President and Chief Executive Officer of
TeleBank since January 1994. Mr. Caplan also serves as Vice President of TCM.
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.
Aileen Lopez Pugh has served as Executive Vice President, Chief Financial
Officer and Treasurer of TeleBanc Financial and TeleBank since August 1994.
Prior to joining management of the Company, Ms. Pugh served as a director from
April 1993 to August 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.
Laurence Greenberg has served as Executive Vice President and Chief
Marketing Officer of TeleBanc Financial and TeleBank since 1995, responsible for
developing and implementing the Company's marketing strategy and overseeing the
call center and deposit operations functions. From October 1994 to 1995, Mr.
Greenberg served as Senior Vice President of Marketing. Prior to joining
management of TeleBanc Financial and TeleBank, Mr. Greenberg served as a
consultant to TeleBank between April and September 1994. From 1993 to April
1994, Mr. Greenberg was a Senior Associate at T.H. Land Research Group, Inc., a
marketing research company serving direct marketing companies. From 1989 to
1993, Mr. Greenberg was a Marketing Manager for specialty publications with
Capital Cities/ABC, Inc.
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<PAGE> 50
Michael Opsahl has served as Executive Vice President and Chief Credit
Officer of TeleBanc Financial, TCM and TeleBank since 1990, responsible for the
development of the loan acquisition process, including the acquisition and
pricing of loans and the swapping of purchased loan pools for mortgage-backed
securities. Prior to joining the Company, Mr. Opsahl served as a trading
assistant at the Federal Home Loan Mortgage Corporation. Mr. Opsahl is the
brother-in-law of Mr. Smilow.
Sang-Hee Yi has served as Executive Vice President and Chief Operating
Officer of TeleBanc Financial and TeleBank since April 1996, responsible for
operations and regulatory compliance. Prior to serving in her current position,
Ms. Yi served as the compliance officer of TeleBanc Financial. From 1986 to
April 1994, she was a federal thrift regulator at the OTS.
David R. DeCamp has served as a director of TeleBanc Financial since its
formation in March 1994 and as a director of TeleBank since July 1992. Mr.
DeCamp is a Senior Vice President of Grubb & Ellis, a commercial real estate
broker. From 1988 to 1996, Mr. DeCamp was a commercial real estate broker with
Cassidy & Pinkard, Inc. Mr. DeCamp is the Chairman of the Audit and Compliance
Committees of TeleBanc Financial and TeleBank, respectively.
Arlen W. Gelbard has served as a director of TeleBanc Financial and
TeleBank since April 1996. Mr. Gelbard is a member of the law firm of Hofheimer
Gartlir & Gross, LLP, New York, New York where he specializes in transactional
real estate, lending, leasing, foreclosures and workouts since 1982. Mr. Gelbard
is the Chairman of the Compensation Committees of the Company and TeleBank,
respectively. On June 30, 1998, Mr. Gelbard will join the Company as its General
Counsel and resign his position as a director of TeleBanc Financial and
TeleBank.
Dean C. Kehler has served as a director of TeleBanc Financial and TeleBank
since March 1997. Mr. Kehler has been a Managing Director of CIBC Wood Gundy
Securities, a subsidiary of CIBC World Markets, and co-head of the High Yield
Group since August 1995. From February 1990 to August 1995, Mr. Kehler was a
founding partner and Managing Director of The Argosy Group, L.P., which was
acquired by CIBC Wood Gundy Securities in August 1995.
Steven F. Piaker has served as a director of TeleBanc Financial and
TeleBank since March 1997. Since January 1997, Mr. Piaker has been a Senior Vice
President of Conning & Company, a provider of asset management, private equity
capital, corporate finance services and research to the insurance and financial
services industries, which he joined in 1994. From September 1992 to June 1994,
Mr. Piaker served as a Senior Vice President of Conseco, Inc. where he was
involved in company-sponsored leveraged buyouts and private placements in the
insurance industry.
Mark Rollinson has served as a director of TeleBanc Financial since its
formation in March 1994 and as a director of TeleBank since 1992. He has been a
self-employed attorney in Leesburg, Virginia, for the past ten years.
Messrs. Kehler and Piaker were elected to the Board of Directors of
TeleBanc Financial pursuant to the Certificate of Designation of the Preferred
Stock (the "Certificate of Designation"). See "Description of
Securities -- Preferred Stock."
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<PAGE> 51
COMMITTEES OF THE BOARD OF DIRECTORS
Each of the Board of Directors of TeleBanc Financial and TeleBank has a
Compensation Committee, an Audit and Compliance Committee and a Stock Option
Committee. The respective committees of the Boards of TeleBanc Financial and
TeleBank are comprised of the same members and meet simultaneously. The members
of each of the Compensation Committee and of the Audit and Compliance Committee
of TeleBanc Financial and TeleBank are Messrs. DeCamp, Gelbard, Kehler and
Piaker.
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 TeleBanc Financial and TeleBank.
The Audit and Compliance Committee reviews TeleBank's compliance with regulatory
matters and 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 response to the letter. In addition, the Audit and Compliance
Committee reviews and recommends to TeleBanc Financial's 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 TeleBanc Financial and TeleBank as it deems appropriate.
The Stock Option Committee, which consists of the same members as the
Compensation Committee, administers the 1997 Stock Option Plan. The Stock Option
Committee selects the employees and independent contractors of the Company to
whom options will be granted.
In addition, TeleBanc Financial's Board of Directors acts as a nominating
committee for selecting nominees for election as directors, and TeleBanc
Financial'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 written notice to TeleBanc Financial's
corporate secretary.
DIRECTOR COMPENSATION
Non-employee directors of TeleBanc Financial receive $750 for each Board of
Directors and committee meeting attended, up to an aggregate of $3,000 per
director annually. Non-employee directors of TeleBank receive $750 for each
TeleBank Board of Directors and committee meeting attended, up to an aggregate
of $12,000 per director annually. In addition, non-employee directors are
reimbursed for travel costs and other out-of-pocket expenses incurred in
attending such meetings.
As additional compensation for services provided to the Company, in May
1994, TeleBanc Financial granted to each of Messrs. DeCamp and Rollinson options
to acquire 10,000 shares of Common Stock, at an exercise price of $3.063 per
share. As of the date of this Prospectus, these options are fully vested. Mr.
Rollinson has exercised options to acquire 10,000 shares of Common Stock. In
August 1996, TeleBanc Financial granted to each of Messrs. DeCamp, Gelbard and
Rollinson options to acquire 20,000 shares of Common Stock, of which options to
acquire 24,000 in the aggregate are vested. As of the date of this Prospectus,
options to acquire 70,000 shares of Common Stock held in the aggregate by such
directors are outstanding.
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<PAGE> 52
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by TeleBanc Financial
and TeleBank to the executive officers of the Company named (the "Named
Executive Officers"), for services rendered to the Company in all capacities
during the periods indicated. The Company has not granted any stock appreciation
rights ("SARs").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
----------------------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- ---- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
David A. Smilow.......................... 1997 $205,000 $200,000 200,000 $15,000
Chairman of the Board of Directors 1996 205,000 188,000 -- 15,000
1995 205,000 150,000 -- 15,000
Mitchell H. Caplan....................... 1997 $205,000 $200,000 200,000 $15,000
Vice Chairman, Chief Executive 1996 205,000 188,000 -- 15,000
Officer and President 1995 205,000 150,000 -- 15,000
Aileen Lopez Pugh........................ 1997 $ 79,500 $100,000 20,000 $13,913
Executive Vice President, 1996 75,000 60,000 30,000 13,500
Chief Financial Officer 1995 75,000 60,000 10,000 13,500
</TABLE>
- ---------------
(1) The total amounts shown in the "All Other Compensation" column for each year
presented represents the dollar value of contributions made by the Company
to the ESOP for the account of the Named Executive Officer.
The following table sets forth certain information with respect to the
options to purchase Common Stock granted to the Named Executive Officers in
1997. All options were granted under the Company's 1994 or 1997 Stock Option
Plan. The Company has not granted any SARs.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL EXERCISE STOCK PRICE APPRECIATION FOR
SECURITIES OPTIONS TO OR BASE OPTION TERM(1)
UNDERLYING EMPLOYEES PRICE PER EXPIRATION ----------------------------
NAME OPTIONS GRANTED IN FISCAL YEAR SHARE DATE 5% 10%
---- --------------- -------------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Smilow........... 200,000(2) 35.0% $ 6.75 2/28/07 $849,008 $2,151,552
Mitchell H. Caplan........ 200,000(2) 35.0 6.75 2/28/07 849,008 2,151,552
Aileen Lopez Pugh......... 20,000(3) 3.5 6.75 2/15/07 84,901 215,155
</TABLE>
- ---------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% assumed annual growth rates mandated by the rules and regulations
promulgated by the Securities and Exchange Commission and, therefore, are
not intended to forecast possible future appreciation, if any, in the Common
Stock price.
(2) Options vested 20% upon grant on February 28, 1997 and 20% become
exercisable ratably in each subsequent year through 2001.
(3) Option vested 20% upon grant on February 15, 1997 and 20% becomes
exercisable ratably in each subsequent year through 2001.
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<PAGE> 53
The following table sets forth information with respect to outstanding
options held by the Named Executive Officers as of December 31, 1997. None of
the Named Executive Officers exercised any stock options during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTION VALUE OF UNEXERCISED IN-THE-MONEY
AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END (1)
------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
David A. Smilow.................. 208,584 202,146 $1,014,696(2) $572,424(2)
Mitchell H. Caplan............... 208,584 202,146 1,014,696(2) 572,424(2)
Aileen Lopez Pugh................ 32,000 38,000 163,375(3) 148,500(3)
</TABLE>
- ---------------
(1) Based on last reported sale price of the Common Stock on December 31, 1997
of $8.875 per share and applicable per share exercise price for the options.
(2) On April 28, 1994, Messrs. Smilow and Caplan were each granted options to
purchase 85,234 shares of Common Stock with an exercise price of $3.063 per
share and options to purchase 124,956 shares of Common Stock with an
exercise price of $3.563 per share. These options expire in April 2004. The
options vested 20% upon grant, and 20% vests ratably on each of the next
four anniversaries of the grant. Also Messrs. Smilow and Caplan were granted
nonqualified options to purchase 200,000 shares of Common Stock on February
28, 1997 with an exercise price of $6.75 and an expiration date of February
28, 2007, which vested 20% upon grant, and 20% vest ratably on each of the
next four anniversaries of the grant. The options expire 10 years after
grant.
(3) The Company has granted a total of 70,000 options to Ms. Pugh: 10,000
options granted on April 28, 1994 with an exercise price of $3.063, 10,000
options granted on February 15, 1995 with an exercise price of $2.75, 30,000
options granted on February 15, 1996 with an exercise price of $3.875 and
20,000 options granted on February 15, 1997 with an exercise price of $6.75.
The options expire in April 2004, February 2005, February 2006 and February
2007, respectively. Twenty percent of each grant of options vested on the
date of grant and 20% vest ratably on the anniversary of each date of grant
in each of the subsequent four years.
STOCK OPTION PLANS
1998 Stock Incentive Plan
The 1998 Stock Incentive Plan (the "1998 Plan") authorizes the issuance of
up to 500,000 shares of Common Stock upon the exercise of stock options, stock
appreciation rights and the award of restricted stock ("Stock Award"). The 1998
Plan became effective on May 27, 1998, and terminates on May 27, 2008. The Plan
is administered by the Stock Option Committee of the Board of Directors (the
"Stock Option Committee") or by any other committee duly appointed by the Board
of Directors or if no Stock Option Committee is appointed, by the Board of
Directors. As of the date of this Prospectus, no options had been granted
pursuant to the 1998 Plan.
Key employees, officers, directors and persons performing consulting or
advisory services for the Company or its affiliates, as defined in the 1998
Plan, who are designated by the Common Stock Committee, are eligible to receive
awards under the 1998 Plan. Awards may be made in the form of stock options,
Stock Awards or stock appreciation rights ("SARs"). Stock options granted under
the 1998 Plan may be either incentive stock options or non-qualified stock
options. Incentive stock options may be granted only to employees of the Company
or any of its affiliates. Participants may also be granted Stock Awards, which
are shares of Common Stock granted subject to the satisfaction of certain
specified conditions. Participants may also be granted a SAR that entitles the
holder to receive the difference between the fair market value of the shares on
the date of grant and the date of exercise of the shares of Common Stock subject
to the award. SARs may be granted in relation to a particular option awarded
under the 1998 Plan and exercisable only
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<PAGE> 54
upon surrender to the Company, unexercised, of that portion of the option to
which the SAR relates. As of June 3, 1998, approximately 25 employees, eight
directors and executive officers were eligible to receive awards under the 1998
Plan.
Options granted under the 1998 Plan are exercisable only to the extent
vested on the date of exercise, and no options may be exercised more than 10
years from the date the option is granted (five years in the case of an
incentive stock option granted to an optionee who owns more than 10% of the
total outstanding Common Stock). The exercise price per share of each option
granted under the 1998 Plan may not be less than 100% (110% in the case of an
optionee who owns more than 10% of the total outstanding Common Stock) of the
fair market value of the Common Stock on the date of grant. Fair market value is
the last sale price of the Common Stock as reported on the over-the-counter
market or, if the Company is quoted on the Nasdaq National Market, the closing
price of the Common Stock as quoted on the Nasdaq National Market on that date
or, if there are no sales of shares reported on that date, the last sale price
or the closing price as reported on the over-the-counter market or quoted on the
Nasdaq National Market, respectively, on the next preceding date on which sales
of Common Stock were reported. To the extent that the aggregate fair market
value (determined on the option grant date) of the shares of Common Stock with
respect to which incentive stock options are exercisable exceeds $100,000, such
options are deemed not to be incentive stock options.
An option may be exercised, in full or in part, provided that the option is
vested. Options may be exercised by written notice delivered to the Company
accompanied by payment of the option exercise price payable (i) in cash, (ii)
with Common Stock owned by the participant, (iii) by delivery to the Company of
(x) irrevocable instructions to deliver directly to a broker the stock
certificates representing the shares for which the option is being exercised and
(y) irrevocable instructions to such broker to sell the stock and to deliver
promptly to the Company the portion of the proceeds equal to the option exercise
price and any amount necessary to satisfy the Company's obligation for
withholding taxes, or (iv) any combination thereof. The Common Stock used to pay
the option exercise price or any portion thereof will be valued at the fair
market value of such Common Stock on the date of exercise and must have been
held for at least six months.
The Stock Option Committee administering the 1998 Plan has the authority to
determine the circumstances under which options vest upon termination of the
employment or service of the participant for any reason. Unless otherwise
provided by the Stock Option Committee, vesting of an option generally ceases on
the date that an option holder terminates employment or service for any reason
with the Company or an affiliate. Options granted under the 1998 Plan terminate
on the date three months after the date on which the participant terminates
employment, or the expiration under the terms of the option agreement, whichever
period is shorter except in the case of death, disability or retirement. If a
participant terminates employment by reason of death or disability, or the
participant's death occurs after termination of employment or service but before
the option has expired, the option held by such participant may be exercised, to
the extent exercisable, for a period of one year from the date of death or
disability or until the expiration of the stated term of such option, whichever
period is shorter. In the event of termination "for cause," any unexercised
option held by such participant shall be forfeited immediately upon the giving
of notice of such termination of employment or service for cause to the
participant.
Options are not transferable by a participant during the participant's
lifetime and may not be assigned, exchanged, pledged, transferred or otherwise
encumbered or disposed of except by will or by the applicable laws of descent
and distribution. Under the 1998 Plan, an option that is not an incentive stock
option may be transferred to immediate family members of the option holder or to
a trust or partnership for such family members; provided, however, that the
option holder receives no consideration for such transfer. In the event of such
transfer, the option and any corresponding SAR that relates to such option must
be transferred to the same person or persons or entity or entities.
Stock Awards by the Stock Option Committee will be subject to such
restrictions as the Stock Option Committee may impose thereon (the
"Restrictions"), including continuous employment or service with the Company or
any of its affiliates for a specified term or the attainment of specific
corporate, divisional or individual performance standards or goals. If the Stock
Option Committee, on the date of the Stock Award, prescribes that a Stock Award
shall become nonforfeitable and transferable only upon the attainment of
52
<PAGE> 55
certain performance objectives, the shares subject to such Stock Award shall
become nonforfeitable and transferable only to the extent that the Stock Option
Committee certified that such objectives have been achieved. The Committee may
endorse a legend on the certificates representing the Stock Award to prevent a
violation of the requirements of the Securities Act, or to implement the
Restrictions with respect to such Stock Award. The Committee may also require
that the participant deliver to the Company a written statement in which the
participant represents and warrants that the shares in the Stock Award are being
acquired for the participant's own account and not with a view to the resale or
distribution thereof.
Stock Awards are nontransferable except by the laws of descent and
distribution. No right or interest of a participant in a Stock Award shall be
liable for, or subject to, any lien, obligation or liability of such
participant. Notwithstanding the restriction on transferability, the Stock
Option Committee may provide that a Stock Award may be transferred to members of
the participant's immediate family, provided that the participant does not
receive consideration for the transfer. The transferee of a Stock Award shall be
bound by the same terms and conditions that governed the Stock Award during the
period that it was held by the participant.
Upon the issuance of a Stock Award to a participant, the stock certificate
representing the Stock Award will be issued and transferred to and in the name
of the participant, whereupon the participant will be entitled to all rights of
a stockholder of the Company with respect to such Stock Award, including the
rights to vote such shares and to receive dividends. The Company will hold such
stock certificate in custody, together with stock powers executed by the
participant in favor of the Company, until the Restricted Period expires and the
restrictions imposed on the Stock Award are satisfied.
The Stock Option Committee has authority to designate each individual to
whom SARs are to be granted and to specify the number of shares covered by such
awards. No participant may be granted corresponding SARs that are related to
incentive stock options which are first exercisable in any calendar year for
stock having an aggregate fair market value that exceeds $100,000. Corresponding
SARs may be granted either at the time of the grant of such option or at any
subsequent time prior to the expiration of such option; provided, however, that
corresponding SARs shall not be offered or granted in connection with a prior
option without the consent of the participant holding such option.
The maximum period in which a SAR may be exercised will be determined by
the Stock Option Committee, except that no corresponding SAR that is related to
an incentive stock option shall be exercisable after the expiration of ten years
from the date such related option was granted. In the case of a SAR that is
related to an incentive stock option granted to a participant who is or is
deemed to be a holder of more than 10% of the outstanding Common Stock, such
corresponding SAR shall not be exercisable after the expiration of five years
from the date such related option was granted. The terms of any corresponding
SAR that is related to an incentive stock option may provide that it is
exercisable for a period less than such maximum period.
Subject to the provisions of the 1998 Plan and the applicable SAR
agreement, a SAR may be exercised in whole at any time or in part from time to
time at such times and in compliance with such requirements as the Stock Option
Committee shall determine; provided, however, that a corresponding SAR that is
related to an incentive stock option may be exercised only to the extent that
the related option is exercisable and only when the fair market value exceeds
the option exercise price of the related option. A SAR granted under the 1998
Plan may be exercised with respect to any number of whole shares less than the
full number for which the SAR could be exercised. A partial exercise of a SAR
shall not affect the right to exercise the SAR from time to time in accordance
with the 1998 Plan and the related agreement with respect to the remaining
shares of Common Stock subject to the SAR. The exercise of a corresponding SAR
shall result in the termination of the related option to the extent of the
number of shares of Common Stock with respect to which the SAR is exercised.
At the Stock Option Committee's discretion, the amount payable as a result
of the exercise of a SAR may be settled in cash, Common Stock or a combination
of cash and Common Stock.
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<PAGE> 56
SARs granted under the 1998 Plan are not transferable except by will or by
the laws of descent and distribution. During the lifetime of the participant to
whom the SAR is granted, the SAR may be exercised only by the participant. The
Stock Option Committee may grant SARs that may be transferred to immediate
family members to the extent and on such terms as may be permitted by Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
the event of any such transfer, a corresponding SAR and the related option must
be transferred to the same person or persons or entity or entities. The holder
of a transferred SAR will be bound by the same terms and conditions that
governed the SAR during the period that it was held by the participant.
Subject to any required stockholder action, the number of shares of Common
Stock subject to each outstanding award and the exercise price per each such
share of Common Stock subject to an option or SAR will be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a subdivision or consolidation of shares of Common Stock or
other capital readjustment or the payment of a stock dividend (but only on the
Common Stock) or any other increase or decrease in the number of shares effected
without receipt of consideration by the Company. If the Company is the surviving
company in a merger or consolidation and unexercised options remain outstanding
under the 1998 Plan, after the effective date of the merger, each holder of an
outstanding option or SAR shall be entitled, upon exercise of that option, to
receive, in lieu of Common Stock, the number and class or classes of shares of
stock or other securities or property to which the holder would have been
entitled if, immediately prior to the merger, the holder had been the holder of
record of a number of shares of Common Stock equal to the number of shares of
Common Stock as to which that option may be exercised.
If the Company is merged into or consolidated with another corporation
under circumstances where the Company is not the surviving corporation (other
than circumstances involving a mere change in the identity, form or place of
organization of the Company), or if the Company is liquidated or dissolved, or
sells or otherwise disposes of substantially all of its assets to another entity
while unexercised options remain outstanding under the 1998 Plan, unless
provisions are made in connection with the transaction for the continuance of
the 1998 Plan and/or the assumption or substitution of options or SARs with new
options or stock appreciation rights covering the stock of the successor
corporation, or the parent or subsidiary thereof, with appropriate adjustments
as to the number and kind of shares and exercise prices, then all outstanding
options, SARs and Stock Awards shall be vested as of the effective date of such
merger, consolidation, liquidation, dissolution, or sale.
The Board of Directors generally may amend the 1998 Plan from time to time,
except that, without the approval of the stockholders of the Company, no
revision or amendment may change the aggregate number of shares of Common Stock
that may be issued under the 1998 Plan. The terms and conditions applicable to
any award may thereafter be amended or modified by mutual agreement between the
Company and the participant or such other persons as may then have an interest
therein.
Federal, state or local law may require the withholding of taxes applicable
to income resulting from an award. A participant shall be required to make
appropriate arrangements with the Company, as the case may be, for satisfaction
of any federal, state or local taxes the Company is required to withhold. The
Stock Option Committee or administering the 1998 Plan or the Board of Directors
may, in its discretion and subject to such rules as it may adopt, permit the
participant to pay all or a portion of the federal, state or local withholding
taxes arising in connection with an award by electing to have the Company
withhold shares of Common Stock having a fair market value on the date specified
in the rules adopted by the Stock Option Committee or Board of Directors
administering the 1998 Plan equal to the amount to be withheld.
1997 Stock Option Plan.
The 1997 Stock Option Plan (the "1997 Plan") provides for the grant of
options to employees, non-employee directors and independent contractors of the
Company. The 1997 Plan is administered by the Stock Option Committee, which
consists of not less than two outside directors appointed by TeleBanc
Financial's Board of Directors. A total of 928,402 shares of Common Stock are
reserved for issuance under the 1997 Plan. Under the 1997 Plan, 821,736 options
have been granted to eligible employees or directors of the Company
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<PAGE> 57
and are outstanding as of June 18, 1997. Options covering not more than 400,000
shares of Common Stock may be granted to any employee during any calendar year.
The option exercise price under the 1997 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
Financial, as defined in the 1997 Plan. Generally, a change in control is deemed
to occur if any person (i) acquires direct or indirect beneficial ownership of
at least 50% of the 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 TeleBanc Financial's Board of Directors. 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 1997 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 upon the death of the
optionee.
Payment for shares purchased under options granted pursuant to the 1997
Plan may be made either in cash or by exchanging shares of Common Stock 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 the Company cash or cash equivalents equal
to the option exercise price plus the amount of any taxes that the Company may
be required to withhold in connection with the exercise of the option.
If an employee's employment with the Company or a 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 one year 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 the Company 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 Financial by reason or merger, consolidation, reorganization,
recapitalization, reclassification, stock split, 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 Financial, an appropriate and proportionate adjustment will be made in
the number and kinds of shares subject to the 1997 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 Financial or upon a
reorganization, merger or consolidation in which TeleBanc Financial is not the
surviving corporation, or upon the sale of substantially all of the assets of
TeleBanc Financial to another corporation, or upon any transaction (including a
merger or reorganization in which TeleBanc Financial is the surviving
corporation) approved by TeleBanc Financial's Board of Directors which results
in any person or entity owning 80% or more of the total combined voting
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power of all classes of stock of TeleBanc Financial, the 1997 Plan and the
options issued thereunder will terminate, unless provision is made in connection
with such transaction for the continuation of the 1997 Plan, the assumption of
the options or both the continuation of the 1997 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 TeleBanc Financial's Board of Directors in its discretion
shall determine.
TeleBanc Financial's Board of Directors may amend the 1997 Plan with
respect to the Common Stock as to which options have not been granted. However,
TeleBanc Financial'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 1997 Plan to fail to satisfy the
requirement of Section 162(m) of the Internal Revenue Code of 1986, as amended,
relating to limitations on the deduction of amounts not constituting qualified
performance-related compensation.
TeleBanc Financial's Board of Directors may at any time terminate or
suspend the 1997 Plan. Unless previously terminated, the 1997 Plan will
terminate automatically on February 25, 2007. No termination, suspension or
amendment of the 1997 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.
1994 Stock Option Plan
In April 1994, the Company adopted the 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, options to purchase up to an aggregate of 649,750
shares of Common Stock are reserved for issuance, and currently 604,750 options
to acquire Common Stock issued under the 1994 are outstanding. The 1994 Plan is
administered by the Company's Compensation Committee.
The option exercise price under the 1994 Plan may not be less than the
greater of par value or 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 optionee beneficially owning more than 10% of the Common Stock). The
maximum option term will be 10 years. No option will be granted more than 10
years after the effective date of the option plan.
Payment for shares purchased under the 1994 Plan may be made either in cash
or by exchanging Common Stock with a fair market value equal to or less than the
total option price plus cash for any difference. Payment of the option price
also may be made by the option holder directing that the shares of Common Stock
subject to the option be delivered to a licensed broker acceptable to the
Company in exchange for cash from the broker. Options may be exercised from time
to time as provided in the option agreement.
The 1994 Plan provides for the grant of options that are intended to
qualify as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended, as well as non-qualifying options. Non-employee
directors of TeleBanc Financial are eligible only for non-qualifying options.
There is a limit of $100,000 on the value of Common Stock (determined at the
time of grant) covered by incentive stock options that first become exercisable
by an optionee in any calendar year.
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. Employees who have completed six months of service are
eligible to participate in the ESOP. Total contributions to the ESOP by TeleBanc
Financial and TeleBank, which are reflected in compensation expense, were
$247,000, $224,000 and $210,000 for the years ending December 31, 1997, 1996 and
1995, respectively.
Under the ESOP, each employer 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
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<PAGE> 59
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 fewer 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 Common Stock. Otherwise, additional
contributions are at the discretion of TeleBanc Financial's Board of Directors.
Contributions may be paid either in cash or in Common Stock. From time to
time, the ESOP may purchase additional shares of Common Stock through the
purchase of shares in the market or from individual stockholders, upon the
original issuance of additional shares, or upon the sale of treasury shares by
TeleBanc Financial. Under its terms, the ESOP may borrow funds to finance
purchases of Common Stock. As of March 31, 1998, the Company had loaned $305,000
to the ESOP to finance the purchase of approximately 120,000 shares of Common
Stock.
TeleBanc Financial's Board of Directors has appointed a committee to
administer the ESOP. Common Stock has been allocated to participants' accounts
and is voted by the trustees in accordance with the directions of participants
on all matters except for specified major corporate issues. Unallocated shares
will be voted by the trustees in their sole discretion. Messrs. Smilow and
Caplan and Ms. Jane Gelman, Vice President and Chief Administrative Officer of
TeleBanc Financial, 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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus, and as adjusted
to give effect to the sale of Common Stock offered hereby by (i) each person or
entity known by the Company to beneficially own 5% or more of the outstanding
shares of Common Stock, (ii) each current director and executive officer of
TeleBanc Financial, and (iii) all directors and executive officers of the
Company, as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) SHARES BEING AFTER THE OFFERING(1)
------------------------ SOLD IN ----------------------
NAME OF BENEFICIAL OWNER(2) NUMBER PERCENT THE OFFERING NUMBER PERCENT
--------------------------- ----------- --------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
David A. Smilow(3)....................... 1,465,376 20.0% -- 1,465,376 12.8%
Mitchell H. Caplan(4).................... 767,957 10.5 -- 767,957 6.7
Aileen Lopez Pugh(5)..................... 83,653 1.8 -- 83,653 *
David R. DeCamp(6)....................... 20,000 * -- 20,000 *
Arlen W. Gelbard(7)...................... 8,000 * -- 8,000 *
Dean C. Kehler(8)........................ 682,590 9.6 -- 682,590 6.1
Steven F. Piaker(9)...................... -- -- -- -- --
Mark Rollinson(10)....................... 19,000 * -- 19,000 *
CIBC WG Argosy Merchant Fund 2 LLC(8).... 682,590 9.6 -- 682,590 6.1
Conning & Company(11).................... 682,590 9.6 -- 682,590 6.1
General American Mutual Holding
Company(12)............................ 877,616 12.3 -- 877,616 7.8
PC Investment Company(13)................ 867,866 12.2 -- 867,866 7.7
The Northwestern Mutual Life Insurance
Company(14)............................ 487,564 6.9 -- 487,564 4.4
TeleBanc Employee Stock Ownership
Plan(15)............................... 422,838 6.0 -- 422,838 3.8
Directors and executive officers, as a
group (8 individuals)(16).............. 3,046,576 38.7% -- 3,046,576 25.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 7,014,448 shares of Common
Stock outstanding as of the date of this Prospectus, assuming the Preferred
Stock Conversion and the issuance of 119,974 shares of Common Stock as a
dividend on the outstanding Preferred Stock immediately prior to the
consummation of the Offering, and 11,114,448 shares of Common Stock
outstanding upon completion of the Offering. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission. For each beneficial owner, shares of Common Stock subject to
options or conversion rights exercisable within 60 days of the date of this
Prospectus.
(2) Except as specifically noted in the footnotes below, the address of each of
the named stockholders is c/o TeleBanc Financial Corporation, 1111 North
Highland Street, Arlington, Virginia 22201.
(3) Includes 264,064 shares of Common Stock issuable upon exercise of options
and 64,200 shares issuable upon exercise of warrants exercisable within 60
days of the date of this Prospectus and 14,236 shares of Common Stock held
by the ESOP and allocated to Mr. Smilow's account. Excludes 358,602 shares
of Common Stock and warrants to acquire 50,000 shares of Common Stock held
by the ESOP (excluding the shares allocated to his account), of which Mr.
Smilow is a trustee.
(4) Includes 290,730 shares of Common Stock issuable upon exercise of options
and 46,000 shares issuable upon exercise of warrants exercisable within 60
days of the date of this Prospectus and 4,489 shares of Common Stock held
by the ESOP and allocated to Mr. Caplan's account. Excludes 368,349 shares
of Common Stock and warrants to acquire 50,000 shares of Common Stock held
by the ESOP (excluding the shares allocated to his account), of which Mr.
Caplan is a trustee. Mr. Caplan disclaims beneficial ownership of options
to acquire 23,000 shares of Common Stock listed above.
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<PAGE> 61
(5) Includes 56,000 shares of Common Stock issuable upon exercise of options
and 12,400 shares of Common Stock issuable upon exercise of warrants
exercisable within 60 days of the date of this Prospectus and 1,053 shares
of Common Stock held by the ESOP and allocated to Ms. Pugh's account.
(6) Includes 18,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of the date of this Prospectus. Mr. DeCamp's
address is Grubb & Ellis, 1717 Pennsylvania Avenue, N.W., Suite 250,
Washington, D.C. 20006.
(7) Includes 8,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of the date of this Prospectus. Mr. Gelbard's
address is c/o Hofheimer Gartlir & Gross, LLP, 633 Third Avenue, New York,
New York 10017.
(8) Mr. Kehler is the designated director for CIBC WG Argosy Merchant Fund 2
LLC ("CIBC Merchant Fund"), which directly holds 7,000 shares of Series C
Preferred Stock that will convert to 561,752 shares of Common Stock
immediately prior to the Offering 92,750 shares of Common Stock issuable
upon exercise of warrants exercisable within 60 days of the date of this
Prospectus. Mr. Kehler is a partner of CIBC Merchant Fund and disclaims
beneficial ownership of such shares. Mr. Kehler's address is c/o CIBC Wood
Gundy, 425 Lexington Avenue, 3rd Floor, New York, New York, 10017.
(9) Mr. Piaker is the designated director for Conning & Company and serves as
its Senior Vice President. Mr. Piaker does not exercise voting or
investment control over the shares held by Conning & Company. Mr. Piaker's
address is c/o Conning & Company, City Place II, 185 Asylum Street,
Hartford, Connecticut 06103.
(10) Includes 8,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of the date of this Prospectus. Mr. Rollinson's
address is P.O. Box 826, Leesburg, Virginia, 22075.
(11) Conning Insurance Capital Limited Partnership III ("CICLP III") directly
holds 4,719 shares of Series A Preferred Stock and 1,414 shares of Series B
Preferred Stock which is convertible into an aggregate of 492,176 shares of
Common Stock upon the Preferred Stock Conversion and 81,262 shares of
Common Stock issuable upon exercise of warrants exercisable within 60 days
of the date of this Prospectus. Conning Insurance Capital International
Partners III, L.P. ("CICIP III") directly holds 667 shares of Series A
Preferred Stock and 200 shares of Series B Preferred Stock which is
convertible into an aggregate of 69,576 shares of Common Stock upon the
Preferred Stock Conversion and 11,488 shares of Common Stock issuable upon
exercise of warrants exercisable within 60 days of the date of this
Prospectus. Conning & Company controls the general partner of each of CICLP
III and CICIP III. The address of Conning & Company is City Place II, 185
Asylum Street, Hartford, Connecticut 06103.
(12) General American Life Insurance Company ("General American"), an indirect
subsidiary of General American Mutual Holding Company directly holds 1,539
shares of Series A Preferred Stock and 461 shares of Series B Preferred
Stock which is convertible into an aggregate of 160,502 shares of Common
Stock issuable upon the Preferred Stock Conversion and a 26,500 shares of
Common Stock issuable upon exercise of warrants exercisable within 60 days
of the date of this Prospectus. General American Mutual Holding Company
indirectly controls Conning & Company and may be deemed to beneficially own
all of the shares held by CICLP III and CICIP III. Accordingly, the shares
held by Conning & Company are also included in the table above. The address
of General American is 700 Market Street, St. Louis, Missouri 63101.
(13) PC Investment Company holds 6,925 shares of Series A Preferred Stock and
1,975 shares of Series B Preferred Stock which is convertible into an
aggregate of 714,228 shares of Common Stock upon the Preferred Stock
Conversion and 117,926 shares of Common Stock issuable upon exercise of
warrants exercisable within 60 days of the date of this Prospectus. The
address of PC Investment Company is 401 Theodore Freund Avenue, Rye, New
York 10580.
(14) The Northwestern Mutual Life Insurance Company ("Northwestern Mutual")
holds 5,000 shares of Series A Preferred Stock which is convertible into
401,252 shares of Common Stock upon the Preferred Stock Conversion and
66,250 shares of Common Stock issuable upon exercise of warrants
exercisable
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<PAGE> 62
within 60 days of the date of this Prospectus. The address of Northwestern
Mutual is 702 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
(15) Includes 50,000 shares of Common Stock issuable upon exercise of warrants
exercisable within 60 days of the date of this Prospectus.
(16) Includes 644,794 shares of Common Stock issuable upon exercise of options
and 215,350 shares of Common Stock issuable upon exercise of warrants
exercisable within 60 days of the date of this Prospectus. Excludes 353,060
shares of Common Stock (except for any shares allocable to the accounts of
Messrs Smilow and Caplan and Ms. Pugh) and warrants to acquire 50,000
shares of Common Stock exercisable within 60 days of the date of this
Prospectus held by the ESOP, of which Messrs. Smilow and Caplan act as
trustees.
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DESCRIPTION OF SECURITIES
The authorized capital stock of TeleBanc Financial consists of 29,500,000
shares of Common Stock, par value $.01 per share, and 500,000 shares of
preferred stock, par value $.01 per share.
COMMON STOCK
As of the date of this Prospectus, there were 7,014,448 shares of Common
Stock outstanding. The Common Stock represents non-withdrawable capital and is
not of an insurable type or insured by the FDIC. The holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of a
majority of the Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. After dividends have been paid
in full, or declared and set aside for payment in full, to holders of preferred
stock, holders of Common Stock are entitled to receive ratably such dividends,
if any, as are declared by TeleBanc Financial's Board of Directors out of funds
legally available therefor. Upon the liquidation, dissolution or winding up of
TeleBanc Financial, the holders of Common Stock are entitled to receive ratably
the net assets of TeleBanc Financial available after the payment of all debts
and other liabilities and subject to the prior rights of any outstanding
preferred stock. Holders of Common Stock are not entitled to preemptive rights
with respect to any Common Stock or other securities of TeleBanc Financial which
may be issued. The outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be, when issued and paid for, fully paid and
nonassessable.
The Certificate of Incorporation also authorizes the issuance of nonvoting
common stock (the "Nonvoting Stock") which is convertible upon certain events
(each, a "Conversion Event") into Common Stock. The Nonvoting Stock has no
voting rights upon any matter, including the election of directors. A Conversion
Event includes (i) a public sale of securities; (ii) any disposition pursuant to
Rule 144 or Rule 144A promulgated pursuant to the Securities Act of no more than
2% of the outstanding voting securities of TeleBanc Financial; (iii) any
transfer pursuant to the right of first refusal in the Unit Purchase Agreement,
dated February 17, 1997 (the "Unit Purchase Agreement"); or (iv) any transfer in
a single transaction to an independent third party who acquires at least a
majority of the voting stock of TeleBanc Financial without regard to the
transfer of such securities. Holders of the Nonvoting Stock may convert such
stock into Common Stock in connection with a Conversion Event if such holder
reasonably believes that such Conversion Event shall be consummated. TeleBanc
Financial does not have any Nonvoting Stock currently outstanding.
PREFERRED STOCK
Upon the completion of the Offering, TeleBanc Financial's Board of
Directors will be authorized, without further stockholder approval, to issue
from time to time up to an aggregate of 500,000 shares of preferred stock in one
or more series and to fix and alter the voting powers, designations, preferences
and other rights of the shares of each such series and the qualifications,
limitations and restrictions thereof (including sinking fund provisions). Any
series of preferred stock may rank senior to the Common Stock as to dividend
rights, liquidation preferences or both, and may have no voting rights. The
holders of the preferred stock are entitled to vote as a separate class or
series under certain circumstances, regardless of any other voting rights which
such holders may have.
Under the Certificate of Designation, the holders of the outstanding
Preferred Stock have the right to designate not more than two individuals for
election to TeleBanc Financial's Board of Directors (the "Preferred Stock
Directors"), and TeleBanc Financial is obligated to nominate such designated
individuals for election to its Board of Directors. The Certificate of
Designation also provides that so long as an affiliate of Conning & Company
("Conning") and CIBC Merchant Fund or an affiliate of CIBC Merchant Fund hold
Preferred Stock, each of them shall have the right to designate one of the
Preferred Stock Directors. CIBC Merchant Fund is an affiliate of CIBC
Oppenheimer Corp. ("CIBC Oppenheimer"), an Underwriter of the Offering. See
"Underwriting." If for any reason CIBC Merchant Fund or Conning elects not to or
due to a regulatory prohibition is unable to designate one of the Preferred
Stock Directors, the holder of the largest percentage of Series A Preferred
Stock other than Conning and CIBC Merchant Fund shall have the right to
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designate the Preferred Stock Director. This right to elect the Preferred Stock
Directors expires upon a public offering, such as the Offering, in which the
aggregate price paid for shares of Common Stock in such offering is equal to or
greater than $25 million. Pursuant to a conversion agreement, dated May 15,
1998, with TeleBanc Financial (the "Conversion Agreement"), each holder of
Preferred Stock has agreed that, upon consummation of the Offering, each share
of Preferred Stock will automatically convert to Common Stock in accordance with
the applicable conversion rate for the particular series of Preferred Stock set
forth in the Certificate of Designation. The Conversion Agreement also provides
that the automatic conversion of the Preferred Stock is contingent upon TeleBanc
Financial paying, prior to or upon such conversion, a dividend on the Preferred
Stock in the form of shares of Common Stock equal to five percent of the number
of shares of Common Stock issuable upon conversion of the Preferred Stock.
Accordingly, upon completion of the Offering there will be no preferred stock
outstanding.
WARRANTS
Upon completion of the Offering, the following warrants to purchase an
aggregate of 1,086,176 shares of Common Stock will be outstanding: (i) warrants
to purchase up to 690,000 shares of Common Stock at an exercise price of $3.83
per share issued in connection with the units offered in TeleBanc Financial's
initial public offering (the "1994 Warrants"), and (ii) warrants to purchase up
to 396,176 shares of Common Stock at an exercise price of $4.75 per share (the
"1997 Warrants") issued in connection with the Unit Purchase Agreement. In each
case, the exercise price of and the number of shares of Common Stock subject to
the warrants is subject to an adjustment based upon certain anti-dilution
provisions. Additionally, TeleBanc Financial issued warrants to acquire 411,126
shares of Common Stock upon certain events (the "Contingent Warrants"). The
following discussion of the warrants is qualified in its entirety by reference
to the detailed provisions of the agreements relating to the issuance of the
warrants and the forms of warrants, which have been incorporated by reference as
exhibits to the Registration Statement on Form S-2 of which this Prospectus
constitutes a part.
1994 Warrants. TeleBanc Financial issued, in connection with its initial
public offering, the 1994 Warrants to purchase up to 690,000 shares of Common
Stock. Each 1994 Warrant entitles the holder (the "1994 Warrantholder") to
purchase one share of Common Stock at an exercise price of $3.83 per share. The
1994 Warrants may be exercised at any time prior to the close of business on May
1, 2004. The exercise price of the 1994 Warrants may be adjusted in the event of
certain reclassifications, stock splits, stock dividends or other dilutive
events. TeleBanc Financial may also authorize the reduction of the exercise
price as may be deemed appropriate by its Board of Directors. In the event of a
reclassification, reorganization or merger of TeleBanc Financial with or into
another corporation (other than a merger in which TeleBanc Financial is the
surviving corporation and which does not result in a reclassification or other
change in the Common Stock), TeleBanc Financial shall cause appropriate
provision to be made so that the holders of the 1994 Warrants shall have the
right to receive upon the exercise of the 1994 Warrants, the kind and amount of
stock, securities or other consideration which holders of the Common Stock will
receive.
1997 Warrants. TeleBanc Financial issued, pursuant to the Unit Purchase
Agreement, the 1997 Warrants to purchase up to 396,176 shares of Common Stock at
an exercise price of $4.75 per share. The exercise price of the 1997 Warrants
and the number of shares of Common Stock issuable to the holders of such
warrants (the "1997 Warrantholders") upon exercise of the 1997 Warrants are
subject to adjustment in certain circumstances, including in the event of a
stock dividend, subdivision or combination of the Common Stock, the issuance of
Common Stock or rights, options or warrants to acquire Common Stock at a price
per share lower than the greater of (i) the fair market value of Common Stock at
the time of issuance, and (ii) $6.75 (which is also subject to adjustment in
certain circumstances, including in the event of a stock dividend, subdivision
or combination of the Common Stock). The 1997 Warrants may be exercised in whole
or in part and expire on February 27, 2005.
Contingent Warrants. TeleBanc Financial issued, pursuant to the Unit
Purchase Agreement, the Contingent Warrants to purchase up to 411,126 shares of
Common Stock at an exercise price of $0.01 per share upon the occurrence of
certain events. The Contingent Warrants may be exercised either (i) upon the
occurrence of a change of control transaction (as defined in the Unit Purchase
Agreement) or (ii) on
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February 27, 2002 (each an "Exercise Event"). The exercise price of the
Contingent Warrants and the number of shares of Common Stock issuable upon
exercise of the Contingent Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, subdivision or
combination of the Common Stock, the issuance of Common Stock or rights, options
or warrants to acquire Common Stock at a price per share lower than the greater
of (i) the fair market value of Common Stock at the time of issuance, and (ii)
$6.75 (which is also subject to adjustment in certain circumstances, including
in the event of a stock dividend, subdivision or combination of the Common
Stock). The Contingent Warrants are exercisable in whole or in part, in an
amount equal to the number of shares of Common Stock necessary to provide an
annual internal rate of return (as defined in the Contingent Warrant) equal to
at least 25% on each unit purchased by such initial holder, provided that such
number of shares of Common Stock does not exceed that number obtained by
multiplying 13.75 by the number of units purchased by the initial holder of the
applicable Contingent Warrant pursuant to the Unit Purchase Agreement. The
Contingent Warrants expire on the later of (i) February 27, 2002, and (ii) 30
days following the completion of all internal rate of return calculations
required as a result of an Exercise Event.
SUBORDINATED DEBT
As of the date of this Prospectus, TeleBanc Financial had outstanding $17.3
million principal amount of 1994 Subordinated Debentures, $13.7 million
principal amount of 1997 Subordinated Debentures and $10.0 million principal
amount of TCT I Junior Subordinated Debentures.
In May and June 1994, TeleBanc Financial issued 15,000 units 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 principal amount of the 1994 Subordinated
Debentures, and 20 detachable warrants to purchase one share each of Common
Stock. The 1994 Subordinated Debentures may not be redeemed prior to May 1,
1999. The 1994 Subordinated Debentures are redeemable at TeleBanc Financial's
option 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 semiannually on May 1 and November 1. The indenture for the 1994
Subordinated Debentures restricts TeleBanc Financial's ability to incur
additional indebtedness, limits cash dividends and other capital distributions
by the Company, requires the maintenance of a reserve equal to 100% of TeleBanc
Financial's annual interest expense on all indebtedness, restricts disposition
of TeleBank or its assets, and limits transactions with affiliates.
On February 28, 1997, TeleBanc Financial sold $29.9 million of units in the
form of 4% convertible preferred stock, the 1997 Subordinated Debentures and
warrants to purchase Common Stock to investment partnerships managed by Conning,
CIBC Merchant Fund 2, General American, PC Investment Company and Northwestern
Mutual. Upon the sale of the units, one representative from Conning and one from
CIBC Merchant Fund were appointed to TeleBanc Financial's Board of Directors.
The units consist of $13.7 million principal amount of 1997 Subordinated
Debentures with the 1997 Warrants to purchase up to 396,176 shares of Common
Stock, $16.2 million in preferred stock, and rights to Contingent Warrants to
purchase up to 411,126 shares of Common Stock. The 1997 Subordinated Debentures
are due in March 31, 2004 and stipulate increases over time in interest rates
subsequent to March 31, 2002 from 9.5% up to 15.25%. The 1997 Subordinated
Debentures restrict the ability of TeleBanc Financial under certain
circumstances to make cash dividends and other capital distributions or to make
payments of principal and interest on indebtedness.
In June 1997, TeleBanc Financial formed TCT I, which in turn sold, at par,
10,000 shares of Capital Securities, Series A, liquidation amount of $1,000, for
a total of $10,000,000 in a private placement. TCT I is a business trust formed
for the purpose of issuing capital securities and investing the proceeds in the
TCT I Junior Subordinated Debentures issued by TeleBanc Financial. The Capital
Securities, Series A mature in 2027 and have an annual dividend rate of 11.0%,
or $1.1 million, payable semiannually. The net proceeds of the sale of the TCT I
Junior Subordinated Debentures were used for general corporate purposes,
including to fund TeleBank's operations. The TCT I Junior Subordinated
Debentures bear interest at the rate of 11.0%, payable semiannually, and mature
in 2027 contemporaneously with the Capital Securities, Series A. TeleBanc
Financial can defer interest payments for up to 10 consecutive interest periods
under certain circumstances, although no interest can be deferred beyond the
maturity date. The TCT I Junior Subordinated Debentures
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may be redeemed prior to June 1, 2007 only upon the occurrence of certain
limited regulatory or tax events. If such events were to occur, TeleBanc
Financial could elect to redeem the notes in whole (but not in part) upon
payment of the present value of the remaining principal and interest payments
due under the TCT I Junior Subordinated Debentures. The TCT I Junior
Subordinated Debentures are redeemable at the option of TeleBanc Financial after
June 1, 2007, at an initial redemption price of 105.5% of the principal amount
plus accrued interest, with the redemption price declining annually thereafter
until it reaches 100.0% on the maturity date. The indenture for the TCT I Junior
Subordinated Debentures requires TeleBanc Financial to maintain 100% beneficial
ownership of the common stock of the TCT I.
TELEBANC CAPITAL TRUST II
Prior to the Offering, TeleBanc Financial formed TeleBanc Capital Trust II,
a Delaware business trust of which TeleBanc Financial owns all of the beneficial
ownership interests. TCT II was formed solely for the purposes of issuing the
BLUS(SM) and investing the net proceeds in the TCT II Junior Subordinated
Debentures to be issued by TeleBanc Financial. Substantially simultaneously with
the Offering, TCT II will offer to the public $25.0 million of BLUS(SM). The
Common Stock and the BLUS(SM) are being sold in separate offerings, and TeleBanc
Financial intends to complete the Offering regardless of whether the BLUS(SM)
Offering is completed.
The BLUS(SM) mature in 2028 and have an annual dividend rate of %,
or $ million, payable quarterly. The net proceeds from the BLUS(SM)
Offering will be used for working capital and general corporate purposes. The
TCT II Junior Subordinated Debentures will bear interest at the rate of
%, payable quarterly, and mature in 2028 contemporaneously with the
BLUS(SM). TeleBanc Financial can defer interest payments for up to 20
consecutive interest periods under certain circumstances, although no interest
can be deferred beyond the maturity date. The TCT II Junior Subordinated
Debentures may be redeemed prior to 2003 only upon the occurrence of
certain limited regulatory or tax events. If such events were to occur, TeleBanc
Financial could elect to redeem the debentures in whole (but not in part) upon
payment of the present value of the remaining principal and interest payments
due under the debentures. The debentures are redeemable at TeleBanc Financial's
option after 2003 at an initial redemption price of % of the principal
amount plus accrued interest, with the redemption price declining annually
thereafter until it reaches 100.0% on the maturity date. The indenture for the
TCT II Junior Subordinated Debentures restricts TeleBanc Financial's ability
under certain circumstances to make cash dividends and other capital
distributions or to make payments of principal and interest on indebtedness, and
requires TeleBanc Financial to maintain 100% beneficial ownership of TCT II.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND TELEBANC
FINANCIAL'S CERTIFICATE OF INCORPORATION AND BYLAWS
TeleBanc Financial is subject to the provisions of Section 203 of the DGCL.
Subject to certain exceptions, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date such person became an
interested stockholder, unless the interested stockholder obtained such status
with the approval of the board of directors or the business combination is
approved in a manner prescribed by the statute. Subject to certain exceptions,
an "interested stockholder" is a person who owns (or an affiliate or associate
of the corporation who within three years prior did own) 15% or more of the
corporation's outstanding voting stock, and the affiliates and associates of
such person. In addition, the Certificate of Incorporation provides that certain
business combinations with interested stockholders or affiliates or associates
must be approved by (i) the holders of 80% of the outstanding shares of voting
stock and (ii) the holders of two-thirds of the voting power of the outstanding
shares of voting stock, excluding with respect to clause (ii) all shares of the
voting stock owned by the interested stockholder or any affiliates or
associates. The higher vote is not required, however, when a business
combination has been approved by two-thirds of the continuing directors or when
certain fair price and procedure requirements are met.
Certain provisions of the Certificate of Incorporation and Bylaws,
summarized below, may be deemed to have an antitakeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a
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stockholder might consider in his, her or its best interest, including those
attempts that might result in a premium over the market price for the shares
held by stockholders.
Restrictions on Election and Size of Board of Directors. Certain
provisions of the Certificate of Incorporation and Bylaws will impede changes in
majority control of TeleBanc Financial's Board of Directors. The Certificate of
Incorporation and Bylaws provide that TeleBanc Financial's Board of Directors
will be divided into three classes, with directors in each class elected for
three-year staggered terms. As a result, approximately one-third of the Board of
Directors will be elected each year. The Certificate of Incorporation and the
Bylaws provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Finally, the Bylaws impose certain restrictions on the nomination by
stockholders of candidates for election to the Board of Directors or the
proposal by stockholders of business to be acted upon at an annual meeting of
stockholders.
The Certificate of Incorporation provides that a director may be removed
only for cause and then only by the affirmative vote of two-thirds of the total
shares eligible to vote at a duly constituted meeting of the stockholders called
expressly for that purpose. Furthermore, 30 days' written notice must be
provided to any director or directors whose removal is to be considered at a
stockholders' meeting called for such purpose.
Special Meetings. The Certificate of Incorporation provides that all
actions taken by the stockholders must be taken at an annual or special meeting
of stockholders or by unanimous written consent. It also provides that a special
meeting of stockholders may be called at any time by the Chairman of the Board
of Directors, a majority of the Board of Directors or by holders of not less
than 50 percent of the voting stock.
Authorization of Preferred Stock. TeleBanc Financial is authorized to
issue preferred stock from time to time in one or more series subject to
applicable provisions of law. The Board of Directors, without stockholder
approval, is authorized to fix the designations, powers, preferences, and other
rights of such shares, including voting rights, which could adversely affect the
voting power of the holders of the Common Stock. See "-- Preferred Stock." In
the event of a proposed merger, tender offer or other unwelcomed attempt to gain
control of TeleBanc Financial, the Board of Directors could authorize the
issuance of a series of preferred stock with rights and preferences that could
impede the completion of such a transaction. Currently, the Board of Directors
has no plans or understandings for the issuance of any additional preferred
stock and does not intend to issue any preferred stock except on terms which the
Board deems to be in the best interest of TeleBanc Financial and its
stockholders.
Approval of Acquisitions of Control. The Certificate of Incorporation
provides that no person may acquire 25% or more of TeleBanc Financial's voting
stock without obtaining the prior approval of two-thirds of TeleBanc Financial's
voting stock at a stockholder meeting called for such purpose and obtaining
prior federal and state regulatory approvals. These provisions do not apply to
the purchase of shares by underwriters in connection with a public offering or
any employee stock purchase plan, pension plan, profit sharing plan or other
employee benefit plan of the Company. Shares acquired in excess of these
limitations are not entitled to vote or take other stockholder action or be
counted in determining the total number of outstanding shares of voting stock in
connection with any matter involving stockholder action. Such excess shares are
not transferable, except with the approval of the Board of Directors, or by an
independent trustee (selected by TeleBanc Financial) for sale on the open market
or otherwise. The proceeds of such sale are paid first, to the trustee for
expenses; second, to the beneficial owner, in an amount up to such owner's
federal income tax basis in such excess shares; and third, to TeleBanc
Financial.
Limitation on Control Share Acquisitions. The Certificate of Incorporation
provides that any person who acquires stock in TeleBanc Financial that would
increase such person's voting power in TeleBanc Financial to or above any of
three thresholds (20%, 33 1/3% or 50%) must receive the approval of the other
stockholders of TeleBanc Financial (other than the interested shares) before
such person can vote that stock. The practical effect of this requirement is to
condition the acquisition of control of TeleBanc Financial on the approval of a
majority of the pre-existing disinterested stockholders. In general, the
provision requires the person who acquires, or seeks to acquire, TeleBanc
Financial shares in numbers that meet or exceed the three thresholds to send a
disclosure statement regarding the acquisition to TeleBanc Financial and provide
for a
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<PAGE> 68
special meeting of stockholders to vote on the proposal. It also provides for
appraisal rights for dissenting stockholders if the proposal is approved. The
purpose of the control share provision is to provide stockholders with an
opportunity to vote on an acquisition that may lead to or result in a change of
control. The control share provision does not affect the terms an acquiring
person must offer to the stockholders. Certain acquisitions are exempt from
these restrictions, including acquisitions that are (i) pursuant to satisfaction
of a pledge or other security interest, or (ii) pursuant to a merger, plan of
share exchange or tender or exchange offer if TeleBanc Financial is a party to
an agreement relating thereto.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Certificate of Incorporation must be approved by a two-thirds vote of TeleBanc
Financial's Board of Directors and also by a majority of TeleBanc Financial's
outstanding stock entitled to vote, provided, however, that approval by
two-thirds of the outstanding stock entitled to vote is required for amending
certain provisions (relating to the Board of Directors; stockholder action
without a meeting; call of special stockholder meetings; limitation on control
share acquisitions; acquisitions of control; criteria for evaluating certain
offers; indemnification; and amendments to the Certificate of Incorporation) and
approval by 80% of the outstanding stock entitled to vote is required for
amending the provisions which address the vote required for certain business
combinations. A majority of the Board of Directors may amend the Bylaws.
Criteria for Evaluating Certain Offers. The Certificate of Incorporation
authorizes the Board of Directors, when evaluating a tender or exchange offer,
merger, consolidation or certain acquisition proposals, to take into account
factors in addition to the potential economic benefit to the stockholders,
including the economic effects on depositors, borrowers and employees of the
insured institution subsidiary and on the communities in which such subsidiary
operates, as well as on the ability of such subsidiary to fulfill the objectives
of an insured institution under applicable federal statutes and regulations.
OTHER RESTRICTIONS ON THE ACQUISITION OF STOCK
Under the Home Owners' Loan Act and the OTS regulations relating to the
acquisition of control of savings associations, an individual or company, alone
or "acting in concert with others," that seeks to acquire more than 25% of the
Common Stock (or acquires more than 10% of the Common Stock and is subject to
certain control factors) would be considered to control TeleBanc Financial and
TeleBank and would be required to obtain prior approval of OTS. Any company that
acquires control (as broadly defined in OTS regulations) of TeleBanc Financial
would become a "savings and loan holding company" subject to supervision,
regulation and examination by the OTS.
LIMITATION ON LIABILITY AND INDEMNIFICATION
As permitted under the DGCL, the Certificate of Incorporation provides that
no director of TeleBanc Financial will be liable for monetary damages for any
breach of fiduciary duty as a director, except (i) for any breach of the
director's duty of loyalty to TeleBanc Financial or its stockholders, (ii) for
acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (iii) for approval of certain unlawful dividends or
stock purchases or redemptions, or (iv) for any transaction from which the
director derived an improper personal benefit. In appropriate circumstances,
equitable remedies such as an injunction or other forms of non-monetary relief
would remain available under Delaware Law. The Certificate of Incorporation also
contains provisions indemnifying the directors and officers of TeleBanc
Financial to the fullest extent permitted by the DGCL.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Fifth Third Bank,
Cincinnati, Ohio.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, TeleBanc Financial will have 11,114,448
shares of Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option). Of these shares, the 4,100,000 shares sold in this
Offering and the 1,500,000 shares sold in TeleBanc Financial's initial public
offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by an "affiliate" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act (an "Affiliate"), may generally be sold only in compliance with
Rule 144 as described below.
Approximately 5,514,448 of the outstanding shares of Common Stock are
"restricted securities" as that term is defined under Rule 144 (the "Restricted
Shares"). Substantially all of the Restricted Shares will be subject to lock-up
agreements as described below. Upon expiration of these agreements, all of the
Restricted Shares will be available for sale in the public market, subject to
the provisions of Rule 144 under the Securities Act. Upon completion of this
Offering, the holders of 3,326,762 of the Restricted Shares will be entitled to
registration rights. Sales of Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price of
the Common Stock. See "-- Registration Rights."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
111,144 shares immediately after this Offering) or (ii) the average weekly
trading volume in the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Securities and Exchange Commission. Such sales under Rule 144 are also subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. In addition, a
person who is not an Affiliate and has not been an Affiliate for at least three
months prior to the sale and who has beneficially owned Restricted Shares for at
least two years may resell such shares without regard to the requirements
described above. TeleBanc Financial is unable to estimate accurately the number
of Restricted Shares that ultimately will be sold under Rule 144 because the
number of shares will depend in part on the market price for the Common Stock,
the personal circumstances of the sellers and other factors. See "Risk
Factors -- Shares Eligible for Future Sale" and "Risk Factors -- Marketability
of Common Stock."
All directors and executive officers of TeleBanc Financial and certain of
TeleBanc Financial's stockholders, who upon the completion of this Offering will
hold in the aggregate 4,850,806 shares of Common Stock, options to purchase
644,794 and warrants to purchase 568,776 shares of Common Stock, have agreed
that they will not, without the prior written consent of BancAmerica Robertson
Stephens, directly or indirectly, offer to sell, sell, contract to sell or
otherwise dispose of any shares of Common Stock beneficially owned by them for a
period of 180 days after the date of this Prospectus, subject to certain
exceptions. BancAmerica Robertson Stephens may, in its sole discretion and at
any time, without notice, release all or any portion of the securities subject
to lock-up agreements.
Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock and could impair TeleBanc Financial's future ability to obtain
capital through an offering of equity securities.
REGISTRATION RIGHTS
TeleBanc Financial has granted certain demand and "piggyback" registration
rights with respect to the 2,399,486 shares of Common Stock underlying the
Preferred Stock, the 119,974 shares of Common Stock issuable as a dividend on
the Preferred Stock, the 396,176 shares of Common Stock underlying the 1997
Warrants and the 411,126 shares of Common Stock underlying the Contingent
Warrants. Upon the consummation of the Offering and subject to certain other
conditions and limitations, the registration rights grant the holders of the
Preferred Stock and the 1997 Warrants (the "Registration Rights Holders") the
right to register all or a portion of the Common Stock held by them or issuable
upon the exercise of 1997 Warrants or the conversion of the Preferred Stock, in
connection with any registration by TeleBanc Financial of shares
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<PAGE> 70
of Common Stock. In addition each of the Preferred Stock holders and the 1997
Warrant holders have the right to require TeleBanc Financial to register its
respective securities up to two times. The registration rights described herein
are subject to certain notice requirements, timing restrictions and volume
limitations which may be imposed by TeleBanc Financial's Board of Directors or
the underwriters of an offering. TeleBanc Financial is required to bear the
expenses of all such registrations. The Registration Rights Holders have
expressly waived their respective registration rights in connection with the
Offering.
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<PAGE> 71
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, CIBC Oppenheimer and Legg Mason Wood Walker,
Incorporated (the "Representatives"), have severally agreed with TeleBanc
Financial, subject to the terms and conditions of the Underwriting Agreement, to
purchase the number of shares of Common Stock set forth opposite their
respective names below. The Underwriters are committed to purchase and pay for
all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BancAmerica Robertson Stephens..............................
CIBC Oppenheimer............................................
Legg Mason Wood Walker, Incorporated........................
---------
Total.................................................. 4,100,000
</TABLE>
The Representatives have advised TeleBanc Financial that the Underwriters
propose to offer the shares of Common Stock to the public at the offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of not in excess of $ per share, of which $ may
be reallowed to other dealers. After the Offering, the offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
such reduction shall change the amount of proceeds to be received by TeleBanc
Financial as set forth on the cover page of this Prospectus.
TeleBanc Financial has granted to the Underwriters an option, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to
615,000 additional shares of Common Stock at the offering price per share set
forth on the cover page of this Prospectus. To the extent that the Underwriters
exercise the option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above table
represents as a percentage of the total number of shares offered hereby. If
purchased, such additional shares will be sold by the Underwriters on the same
terms as those on which the shares offered hereby are being sold.
Immediately prior to the Offering, CIBC World Markets, an affiliate of CIBC
Oppenheimer, will beneficially own, through an affiliate, CIBC Merchant Fund,
561,752 shares of Common Stock issuable upon the Preferred Stock Conversion and
28,088 shares of Common Stock issuable as a dividend on the Preferred Stock held
by such affiliate, 1997 Warrants to acquire 92,750 shares of Common Stock and
Contingent Warrants to acquire 96,250 shares of Common Stock. See "Description
of Securities -- Preferred Stock." As a result of the foregoing, CIBC
Oppenheimer has in respect of the Offering a "conflict of interest" under Rule
2720 ("Rule 2720") of the National Association of Securities Dealers, Inc. (the
"NASD").
The Offering will be conducted in accordance with Rule 2720 which provides
that, among other things, when an NASD member firm participates in the offering
of equity securities of a company with which such member has a "conflict of
interest" (as defined in Rule 2720), the public offering price can be no higher
than that recommended by a "qualified independent underwriter" (as defined in
Rule 2720) (a "QIU"). BancAmerica Robertson Stephens is serving as the QIU in
the Offering and will recommend a price in compliance with the requirements of
Rule 2720. BancAmerica Robertson Stephens has performed due diligence with
investigations and reviewed and participated in the preparation of this
Prospectus and the Registration Statement of which this Prospectus forms a part.
BancAmerica Robertson Stephens, in its capacity as QIU, will receive no
additional compensation as such in connection with the Offering.
The Underwriting Agreement contains covenants of indemnity among the
underwriters and TeleBanc Financial against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
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The Underwriters will not confirm sales to any accounts over which they
exercise discretionary authority without the prior specific written approval of
the customer.
Prior to the Offering, there has been only a limited public market for the
Common Stock. Consequently, the offering price for the Common Stock offered
hereby will be determined through negotiations among TeleBanc Financial and the
Representatives. Among the factors to be considered in such negotiations are the
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant. See "Determination of Offering Price."
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of Common Stock on behalf of the Underwriters for the
purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of Common Stock on behalf
of the Underwriters to reduce a short position incurred by the Underwriters in
connection with the Offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the Offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Representatives in a syndicate covering transaction and has therefore not
been effectively placed by such Underwriter or syndicate member. The
Representatives have advised that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shaw Pittman Potts & Trowbridge, Washington, D.C., a
partnership including professional corporations. Certain legal matters relating
to this Offering will be passed upon for the Underwriter by Arent Fox Kintner
Plotkin & Kahn, PLLC, Washington, D.C.
EXPERTS
The Consolidated Financial Statements as of December 31, 1996 and 1997 and
for each of the three years in the period ending December 31, 1997 included in
this Prospectus and Registration Statement to the extent indicated in their
report have been audited by Arthur Andersen LLP, independent certified public
accountants, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by TeleBank Financial with the Securities and
Exchange Commission (the "Commission") pursuant to the Exchange Act are
incorporated by reference herein: Annual Report on Form 10-K for the year ended
December 31, 1997, and Amendment No. 1 to the Form 10-K on Form 10-K/A, as filed
on April 2, 1998, Amendment No. 2 to the Form 10-K on Form 10-K/A, as filed on
April 30, 1998, Amendment No. 3 to the Form 10-K on Form 10-K/A, as filed on May
14, 1998, Amendment No. 4 to the Form 10-K on Form 10-K/A, as filed on May 15,
1998 and Amendment No. 5 to Form 10-K on Form 10-K/A as filed on June 3, 1998;
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as filed on
May 15, 1998; and the Current Report on Form 8-K, as filed on January 29, 1998.
All other reports and other documents filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, since the end of the
fiscal year covered by the Annual Report referred to above
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and prior to the date of this Prospectus, shall be deemed to be incorporated by
reference in this Prospectus and to be a part thereof.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
TeleBank Financial will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referred to above which have been incorporated
herein by reference, other than exhibits to such documents. Written requests for
such copies should be addressed to: TeleBanc Financial Corporation, 1111 North
Highland Street, Arlington, Virginia 22201, Attention: Investor Relations.
AVAILABLE INFORMATION
TeleBanc Financial is subject to certain informational requirements of the
Exchange Act and, upon commencement of the Offering, in accordance therewith,
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, such reports, proxy
statements and other information filed by TeleBanc Financial 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 located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60611 and Seven World Trade
Center, Suite 1300, New York, New York 10048. The Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.
TeleBanc Financial has filed with the Commission in Washington, D.C., a
registration statement on Form S-2 (together with all amendments thereto, the
"Registration Statement") under the Securities Act, with respect to the
securities covered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain items of which
are contained in or incorporated by reference as exhibits to the Registration
Statement as permitted by the Commission's rules and regulations. For further
information with respect to TeleBanc Financial and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
filed or incorporated by reference as a part thereof. Statements contained
herein concerning the provisions of documents filed with, or incorporated by
reference in, the Registration Statement as exhibits are necessarily summaries
of such documents and each such statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission. All
of these documents may be inspected without charge at the offices of the
Commission as described above, and copies may be obtained therefrom at
prescribed rates.
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<PAGE> 74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Financial Condition -- As of
December 31, 1996 and 1997................................ F-3
Consolidated Statements of Operations -- For the Years Ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Changes in Stockholders'
Equity -- For the Years Ended December 31, 1995, 1996 and
1997...................................................... F-5
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of TeleBanc Financial Corporation (a Delaware Corporation) and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years ended December 31, 1997. 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 provide 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, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Vienna, VA
June 22, 1998
F-2
<PAGE> 76
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 3,259 $ 92,156
Trading securities.......................................... -- 21,110
Investment securities available-for-sale.................... 78,826 91,237
Mortgage-backed securities available-for-sale............... 184,743 319,203
Loans receivable held-for-sale.............................. 166,064 149,086
Loans receivable, net....................................... 185,757 391,618
Other assets................................................ 29,316 35,942
-------- ----------
Total assets........................................... $647,965 $1,100,352
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................... $390,486 $ 522,221
Advances from the Federal Home Loan Bank of Atlanta......... 144,800 200,000
Securities sold under agreements to repurchase.............. 57,581 279,909
Subordinated debt, net...................................... 16,586 29,614
Other liabilities........................................... 13,854 13,212
-------- ----------
Total liabilities...................................... 623,307 1,044,956
Corporation--Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Corporation................ -- 9,572
Commitments and contingencies............................... -- --
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value, 500,000
shares authorized
Series A, 18,850 issued and outstanding................ -- 9,634
Series B, 4,050 issued and outstanding................. -- 2,070
Series C, 7,000 issued and outstanding................. -- 3,577
Common stock, $0.01 par value, 29,500,000 shares authorized;
4,099,000 and 4,458,322 issued and outstanding at December
31, 1996 and 1997 20 22
Additional paid-in-capital.................................. 14,637 16,207
Retained earnings........................................... 7,905 11,576
Unrealized gain on securities available-for-sale, net of
tax....................................................... 2,096 2,738
-------- ----------
Total stockholders' equity............................. 24,658 45,824
-------- ----------
Total liabilities and stockholders' equity............. $647,965 $1,100,352
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 77
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans.................................................. $17,726 $23,089 $34,729
Mortgage-backed and related securities................. 20,205 17,955 17,646
Investment securities.................................. 2,347 4,690 5,702
Trading securities..................................... -- -- 1,124
Other.................................................. 233 66 100
------- ------- -------
Total interest income............................. 40,511 45,800 59,301
Interest expense:
Deposits............................................... 17,033 21,357 25,958
Advances from the Federal Home Loan Bank of Atlanta.... 5,985 6,689 9,885
Repurchase agreements.................................. 6,839 4,569 6,941
Subordinated debt...................................... 2,089 2,200 3,279
------- ------- -------
Total interest expense............................ 31,946 34,815 46,063
------- ------- -------
Net interest income............................... 8,565 10,985 13,238
Provision for loan losses.............................. 1,722 919 921
------- ------- -------
Net interest income after provision for loan
losses.......................................... 6,843 10,066 12,317
------- ------- -------
Non-interest income:
Gain on sale of available-for-sale securities.......... 3,412 935 982
Gain on sale of loans.................................. 232 874 1,148
Gain on trading securities............................. -- -- 1,204
Fees, service charges, and other....................... 133 947 759
------- ------- -------
Total non-interest income......................... 3,777 2,756 4,093
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits................ 3,030 3,690 4,909
SAIF assessment................................... -- 1,671 --
Other............................................. 2,531 3,014 4,133
------- ------- -------
Total general and administrative expenses......... 5,561 8,375 9,042
Other non-interest expenses:
Net operating cost of real estate acquired through
foreclosure.......................................... 430 238 278
Amortization of goodwill and other intangibles......... 249 462 822
------- ------- -------
Total other non-interest expenses...................... 679 700 1,100
------- ------- -------
Total non-interest expenses............................ 6,240 9,075 10,142
------- ------- -------
Income before income tax expense and minority
interest........................................ 4,380 3,747 6,268
Income tax expense................................ 1,660 1,195 1,657
Minority interest in subsidiary................... -- -- 394
------- ------- -------
Net income........................................ 2,720 2,552 4,217
Preferred stock dividends......................... -- -- 546
------- ------- -------
Net income available to common stockholders....... $ 2,720 $ 2,552 $ 3,671
======= ======= =======
Earnings per share:
Basic.................................................. $ 0.66 $ 0.62 $ 0.84
Diluted................................................ $ 0.66 $ 0.58 $ 0.57
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 78
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
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, 1994.... $ -- $20 $14,637 $ 2,633 $ (262) $17,028
Net income....................... -- -- -- 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....................... -- -- -- 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
Net income....................... -- -- -- 4,217 -- 4,217
Common stock issued.............. -- 2 1,570 -- -- 1,572
Issuance of 4% cumulative
preferred stock, Series A...... 9,634 -- -- -- -- 9,634
Issuance of 4% cumulative
preferred stock, Series B...... 2,070 -- -- -- -- 2,070
Issuance of 4% cumulative
preferred stock, Series C...... 3,577 -- -- -- -- 3,577
Dividends on 4% cumulative
preferred stock................ -- -- -- (546) -- (546)
Unrealized gain on
available-for-sale securities,
net of tax effect.............. -- -- -- -- 642 642
------- --- ------- ------- ------ -------
Balances at December 31, 1997.... $15,281 $22 $16,207 $11,576 $2,738 $45,824
======= === ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 79
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 2,720 $ 2,552 $ 4,217
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Minority interest....................................... -- -- 394
Equity in losses of subsidiaries........................ -- 274 1,129
Depreciation, amortization and discount accretion....... (2,153) (1,516) (1,038)
Provision for loan losses............................... 1,722 919 921
Provision for losses on foreclosed real estate.......... 213 78 19
Other gains and losses, net............................. (153) (1,011) (1,624)
Deferred income tax provision........................... (559) (224) (445)
Proceeds from sales of loans held-for-sale.............. -- 27,865 60,145
Purchases of loans held-for-sale........................ -- (91,943) (72,804)
Net realized gains on available-for-sale securities,
loans held-for-sale and trading....................... (3,412) (935) (2,613)
Purchases of trading assets............................. -- -- (100,630)
Proceeds from sale of trading assets.................... -- -- 80,990
Increase in accrued interest receivable................. (4,954) (2,220) (1,492)
Increase in accrued expenses and other liabilities...... 2,693 3,730 345
Increase in other assets................................ (80) (2,433) (3,373)
Interest credited to deposits........................... 17,033 21,361 25,958
--------- --------- ---------
Net cash (used in) provided by operating activities......... 13,070 (43,503) (9,901)
--------- --------- ---------
Cash flows from investing activities:
Net increase in loans................................... (98,439) (90,717) (269,036)
Equity investments in subsidiaries...................... -- (2,359) (1,736)
Purchases of available-for-sale securities.............. (122,785) (356,882) (395,675)
Proceeds from sale of available-for-sale securities..... 71,084 220,293 144,718
Proceeds from maturities of and principal payments on
available-for-sale securities......................... 39,646 201,547 197,036
Net sales (purchases) of premises and equipment......... (537) (842) 110
Proceeds from sale of foreclosed real estate............ -- 1,156 1,563
--------- --------- ---------
Net cash used in investing activities....................... (111,031) (27,804) (323,020)
--------- --------- ---------
Cash flows from financing activities:
Net increase in non-interest bearing demand, savings and
NOW deposit accounts.................................. 77,056 62,625 105,777
Increase in advances from FHLB.......................... 59,000 273,500 322,000
Payments on advances from FHLB.......................... (49,500) (234,200) (266,800)
Net increase (decrease) in securities sold under
agreements to repurchase.............................. 14,292 (36,324) 222,328
Net increase in other borrowed funds.................... -- -- 13,028
Issuance of trust preferred stock, net.................. -- -- 9,572
Increase in common stock and additional
paid-in-capital....................................... -- -- 16,853
Interest paid to minority interest in subsidiary........ -- -- (394)
Dividends paid on common and preferred stock............ -- -- (546)
--------- --------- ---------
Net cash provided by financing activities................... 100,848 65,601 421,818
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 2,887 (5,706) 88,897
Cash and cash equivalents at beginning of period............ 6,078 8,965 3,259
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 8,965 $ 3,259 $ 92,156
========= ========= =========
Supplemental information:
Interest paid on deposits and borrowed funds................ $ 29,852 $ 32,660 $ 45,440
Income taxes paid........................................... 950 972 2,473
Gross unrealized gain (loss) on marketable securities
available-for-sale........................................ 2,926 795 873
Tax effect of gain (loss) on available-for-sale
securities................................................ 1,109 254 231
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 80
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., TeleBanc
Capital Markets, Inc. ("TCM"), formerly known as Arbor Capital Partners, Inc.
("Arbor"), and TeleBanc Capital Trust I ("TCT"). The Bank is a federally
chartered savings bank, which provides deposit accounts insured by the Federal
Deposit Insurance Corporation ("FDIC") to customers nationwide. TCM is a
registered investment advisor, funds manager, and broker-dealer. TCT 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 Bank, through its wholly-owned subsidiary TeleBanc Servicing
Corporation ("TSC"), funded 50% of the capital commitment for two new entities,
AGT Mortgage Services, LLC ("AGT") and AGT PRA, LLC ("AGT PRA"). AGT services
performing loans and administers workouts for troubled or defaulted loans for a
fee. Management ceased operation of AGT on July 31, 1997. 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. The net equity investment in AGT PRA at December 31, 1997 is $2.1
million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TeleBank, TCM, TCT, and TSC, a wholly owned subsidiary of the Bank. All
significant intercompany transactions and balances are eliminated in
consolidation. The investment in AGT PRA is accounted for under the equity
method.
STOCK DIVIDEND
On June 22, 1998, the Company's shareholders approved the distribution of a
100% stock dividend on its outstanding Common Stock. The effect of the stock
dividend has been retroactively applied in the Consolidated Financial Statements
for all periods presented.
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, trading
securities, and the valuation of real estate acquired in connection with
foreclosures and mortgage servicing rights.
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.
F-7
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In
December 1995, the Company reclassified the existing held-to-maturity investment
and mortgage-backed securities portfolios as available-for-sale.
Trading securities are bought and held principally for the purpose of
selling 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 $21.1 million classified as
trading securities at December 31, 1997. No securities were classified as
trading securities at December 31, 1996. For the period ending December 31,
1997, the Company recognized $564,000 in realized gains from the sale of trading
assets and $640,000 in unrealized appreciation of trading assets. 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 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. 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.
The market value of these mortgage loans is determined by obtaining market
quotes for loans with similar characteristics.
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 ASSETS
Nonperforming assets consist of loans for which interest is no longer being
accrued, loans which have been restructured in order to increase the 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
F-8
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on nonaccrual loans is recognized as interest income or applied to principal
when it is doubtful that full payment will be collected.
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
recognized as part of the loss or gain upon sale and not amortized or accreted,
respectively.
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 income 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
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.
In order to be eligible for hedge accounting treatment, high correlation must be
probable at the inception of the hedge and must be maintained throughout the
hedge period. Once high correlation ceases, any gain or loss on the hedge, up to
the time high correlation ceased, should be recognized to the extent the results
of the hedging instrument were not offset by the effects of interest rate
changes on the hedged item. Upon the sale or disposition of the hedged item, the
hedging instrument should be marked-to-market with changes recorded in the
income statement.
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.
F-9
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
Other assets include purchased loan servicing rights, premiums paid on
interest rate caps, and prepaid assets. The Bank services the loans underlying
these servicing rights. The cost of the loan servicing rights is amortized in
proportion to, and over the period of, the estimated net servicing income. For
the period ending December 31, 1997, amortization expense of loan servicing
rights was $547,000. 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, 1997,
the amortized cost and fair value of the loan servicing rights were $3.3 million
and $3.4 million, respectively. No valuation allowance was recognized at
December 31, 1997.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 125"), as amended by
Statement of Financial Accounting Standards No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125--An Amendment of FASB
Statement No. 125 ("SFAS 127"). The implementation of SFAS 125 did not have a
material impact on the company's final position.
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 interest rate 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.
RECLASSIFICATIONS
Certain reclassifications of the 1995 and 1996 financial statements have
been made to conform to the 1997 presentation.
3. CAPITAL REQUIREMENTS
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, 1997, that the Bank meets all capital
adequacy requirements to which it is subject. As of December 31, 1996 and 1997,
the OTS categorized the Bank as well capitalized
F-10
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
---------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ -------- ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Core Capital (to adjusted tangible
assets)........................ $31,726 5.08% .$24,999 .4.0% .$31,248 .5.0%
Tangible Capital (to tangible
assets)........................ $31,711 5.07% .$ 9,374 .1.5% N/A N/A
Tier I Capital (to risk weighted
assets)........................ $31,726 9.69% N/A N/A .$19,654 .6.0%
Total Capital (to risk weighted
assets)........................ $34,104 10.41% .$26,205 .8.0% .$32,756 .10.0%
As of December 31, 1997:
Core Capital (to adjusted tangible
assets)........................ $52,617 5.06% .$41,606 .4.0% .$52,008 .5.0%
Tangible Capital (to tangible
assets)........................ $52,608 5.06% .$15,602 .1.5% N/A N/A
Tier I Capital (to risk weighted
assets)........................ $52,617 11.25% N/A N/A .$28,057 .6.0%
Total Capital (to risk weighted
assets)........................ $55,701 11.91% .$37,409 .8.0% .$46,761 .10.0%
</TABLE>
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.
F-11
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT SECURITIES
The cost basis and estimated fair values of investment securities
available-for-sale at December 31, 1996 and 1997, by contractual maturity, are
shown below:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
(IN THOUSANDS)
<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
======= ====== ==== =======
1997:
Due within one year:
Agency notes........................... $ 539 $ -- $ -- $ 539
Other investments...................... 323 1 -- 324
Due within one to five years:
Municipal bonds........................ 565 12 -- 577
Other investments...................... 25,038 16 -- 25,054
Certificate of deposit................. 499 -- -- 499
Due within five to ten years:
Corporate debt......................... 7,433 242 -- 7,675
Municipal bonds........................ 3,562 130 -- 3,692
Other investments...................... 175 -- -- 175
Due after ten years:
Agency notes........................... 21,608 398 (40) 21,966
Equities............................... 15,038 436 (50) 15,424
Corporate debt......................... 11,103 797 -- 11,900
Municipal bonds........................ 3,200 212 -- 3,412
------- ------ ---- -------
$89,083 $2,244 $(90) $91,237
======= ====== ==== =======
</TABLE>
The proceeds from sale and 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. The proceeds from sale and 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 and gross realized gains and losses on investment securities
available-for-sale that were sold in 1997 were $25.9 million, $423,000, and
$34,000, respectively.
F-12
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1997, by
contractual maturity, are shown as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======== ====== ======= ========
1997:
Due within one year:
Agencies............................... $ 939 $ -- $ -- $ 939
Due within one to five years:
Agencies............................... 627 2 (6) 623
Private issuer......................... 2,643 -- (22) 2,621
Due within five to ten years:
Private issuer......................... 5,982 39 -- 6,021
Due after ten years:
Agencies............................... 23,907 124 (27) 24,004
Private Issuer......................... 143,889 2,971 (1,443) 145,417
Collateralized mortgage obligations.... 139,663 536 (621) 139,578
-------- ------ ------- --------
$317,650 $3,672 $(2,119) $319,203
======== ====== ======= ========
</TABLE>
The Company pledged $61.4 million and $104.1 million of private issuer
mortgage-backed securities as collateral for repurchase agreements at December
31, 1996 and 1997, respectively. The proceeds from sale and 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.
The proceeds from sale and 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. The proceeds from sale and gross realized gains and losses
on mortgage-backed securities available-for-sale that were sold in 1997 were
$112.4 million, $845,000 and $253,000, respectively.
F-13
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans (principally conventional):
Secured by one-to-four family residences.............. $359,563 $547,734
Secured by commercial real estate..................... 4,017 3,009
Secured by mixed-use property......................... 1,180 856
Secured by five or more dwelling units................ 1,516 1,447
Secured by land....................................... 781 378
-------- --------
367,057 553,424
Less:
Net deferred loan origination fees.................... (42) (34)
Unamortized discounts, net............................ (13,750) (9,938)
-------- --------
Total first mortgage loans................................. 353,265 543,452
Other loans:
Home equity and second mortgage loans................. 1,208 541
Other................................................. 305 305
-------- --------
354,778 544,298
Less: allowance for loan losses............................ (2,957) (3,594)
-------- --------
Net loans receivable............................. $351,821 $540,704
======== ========
</TABLE>
The mortgage loans are located primarily in California, New York, and
Virginia according to the following percentages 15.1%, 13.3%, and 7.4%,
respectively. As of December 31, 1997, the mortgage loan portfolio consisted of
variable rate loans of $335.2 million, or 62%, and fixed rate loans of $205.5
million, or 38%. The weighted average maturity of mortgage loans secured by one
to four family residences is 266 months as of December 31, 1997.
The unpaid principal balance of mortgage loans owned by the Company but
serviced by other companies was $203.9 million and $301.5 million at December
31, 1996 and 1997, respectively.
Loans past due 90 days or more, and therefore on non-accrual status at
December 31, 1996 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans:
Secured by one-to-four family residences............... $ 8,979 $10,802
Secured by commercial real estate...................... 1,217 635
Home equity and second mortgage loans....................... 54 --
------- -------
Total............................................. $10,250 $11,437
======= =======
</TABLE>
The interest accrual balance for each loan that enters non-accrual is
reversed from income. If all nonperforming loans had been performing during
1995, 1996, and 1997, the Bank would have recorded $365,000, $789,000 and
$739,000, respectively, in additional interest income. There were no commitments
to lend additional funds to these borrowers as of December 31, 1996 and 1997.
F-14
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the allowance for loan losses for the years ended December 31,
1995, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of the year.................... $ 989 $2,311 $2,957
Provision for loan losses......................... 1,722 919 921
Charge-offs, net.................................. (400) (273) (284)
------ ------ ------
Balance, end of year.............................. $2,311 $2,957 $3,594
====== ====== ======
</TABLE>
According to Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan, ("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 1997:
<TABLE>
<CAPTION>
AMOUNT OF
TOTAL RECORDED
RECORDED INVESTMENT
INVESTMENT IN AMOUNT OF NET OF
IMPAIRED SPECIFIC SPECIFIC
DESCRIPTION OF LOANS LOANS RESERVES RESERVES
-------------------- ------------- --------- ----------
(IN THOUSANDS)
<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 -- 184
------- ------ ------
Total...................................... $ 435 $ 8 $ 427
======= ====== ======
1997:
Impaired loans:
Commercial real estate.......................... $ 635 $ 248 $ 387
One-to-four family.............................. 10,802 1,760 9,042
------- ------ ------
Total...................................... $11,437 $2,008 $9,429
======= ====== ======
Restructured loans:
Commercial real estate.......................... $ 248 $ -- $ 248
One-to-four family.............................. 177 -- 177
------- ------ ------
Total...................................... $ 425 $ -- $ 425
======= ====== ======
</TABLE>
The average recorded investment in impaired loans, with identified losses,
as of December 31, 1995, 1996 and 1997 was $2.0 million, $2.2 million and $2.3
million, respectively. The related amount of interest income the Company would
recognize as additional interest income for the years ended December 31, 1995,
1996 and
F-15
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 was $365,000, $789,000, and $739,000, 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 applied
to principal when it is doubtful that full payment will be collected.
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure at December 31, 1996 and December
31, 1997 was $1.2 million and $681,000, respectively. Activity in the allowance
for real estate losses for the years ended December 31, 1995, 1996, and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 92 $ 213 $ 65
Provision for real estate losses............................ 256 77 19
Charge-offs................................................. (135) (225) (84)
----- ----- ----
Balance, end of year........................................ $ 213 $ 65 $ --
===== ===== ====
</TABLE>
8. LOANS SERVICED FOR OTHERS
Mortgage loans serviced by the Bank 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 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans underlying pass-through securities:
Federal Home Loan Mortgage Corporation................. $ 2,843 $ 2,140
Federal National Mortgage Association.................. 11,548 28,417
------- -------
Subtotal............................................... $14,391 $30,557
Mortgage loan portfolio serviced for:
Other investors........................................ 31,465 27,125
------- -------
Total............................................. $45,856 $57,682
======= =======
</TABLE>
Custodial escrow balances held in connection with the foregoing loans
serviced were approximately $84,000 and $120,000 at December 31, 1996 and 1997,
respectively.
Included in other assets is purchased mortgage servicing rights of $2.8
million and $3.3 million as of December 31, 1996 and 1997, respectively.
9. DEPOSITS
The Bank initiates deposits directly with customers through contact on the
phone, the mail, and walk-in 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 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
F-16
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deposit liabilities assumed, plus the amount of the deposit liabilities (less
certain renewals) multiplied by 0.25 percent. Deposits at December 31, 1996 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT
DECEMBER 31, AMOUNT PERCENT
------------- ------------------- -------------
1996 1997 1996 1997 1996 1997
----- ----- -------- -------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts, non
interest-bearing.................... --% --% $ 309 $ 761 --% 0.2%
Money market.......................... 5.10 5.26 109,835 122,185 28.1 23.4
Passbook savings...................... 3.00 3.00 1,758 665 0.5 0.1
Certificates of deposit............... 6.28 6.24 278,584 398,610 71.4 76.3
---- ---- -------- -------- ----- -----
Total....................... $390,486 $522,221 100.0% 100.0%
======== ======== ===== =====
</TABLE>
Certificates of deposit and money market accounts, classified by rates as
of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT 1996 1997
------ -------- --------
(IN THOUSANDS)
<S> <C> <C>
0- 1.99%................................................... $ 5,235 $ 5
2- 3.99%................................................... 148 --
4- 5.99%................................................... 210,481 231,048
6- 7.99%................................................... 170,056 289,046
8- 9.99%................................................... 1,709 696
10-11.99%................................................... 790 --
-------- --------
Total............................................. $388,419 $520,795
======== ========
</TABLE>
At December 31, 1997, scheduled maturities of certificates of deposit and
money market accounts are as follows:
<TABLE>
<CAPTION>
LESS THAN 1-2 2-3 3-4 4-5 5+
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- -------- ------- ------- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
0- 1.99%............ $ 5 $ -- $ -- $ -- $ -- $ -- $ 5
2- 3.99%............ -- -- -- -- -- -- --
4- 5.99%............ 209,547 17,708 2,217 1,126 362 88 231,048
6- 7.99%............ 37,687 124,905 97,079 13,550 9,849 5,976 289,046
8- 9.99%............ 578 -- 82 -- 36 -- 696
10-11.99%............ -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------ --------
$247,817 $142,613 $99,378 $14,676 $10,247 $6,064 $520,795
======== ======== ======= ======= ======= ====== ========
</TABLE>
The aggregate amount of certificates of deposit with denominations greater
than or equal to $100,000 was $45.1 million and $47.5 million at December 31,
1996 and 1997, respectively.
F-17
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on deposits for the years ended December 31, 1995, 1996,
and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Money market............................................. $ 2,036 $ 4,740 $ 6,353
Passbook savings......................................... 78 59 27
Certificates of deposit.................................. 14,919 16,558 19,578
------- ------- -------
Total.......................................... $17,033 $21,357 $25,958
======= ======= =======
</TABLE>
Accrued interest payable on deposits at December 31, 1996 and 1997 was
$667,000 and $728,000, respectively.
10. ADVANCES FROM THE FHLB OF ATLANTA
Advances to the Bank from the FHLB of Atlanta at December 31, 1996 and 1997
were as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
1996 RATE 1997 RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996.......................................... $ -- 5.52% $ -- --%
1997.......................................... 64,800 5.56 -- --
1998.......................................... 41,000 5.53 71,000 5.61
1999.......................................... 39,000 5.60 129,000 5.69
-------- ---- -------- ----
Total............................... $144,800 5.56% $200,000 5.66%
======== ==== ======== ====
</TABLE>
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 1997, 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 1997,
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 $259.9 million at December
31, 1996 and 1997, 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.
F-18
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning borrowings under fixed and variable rate coupon
repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average balance during the year.................... $68,920 $117,431
Weighted average interest rate during the year.............. 5.77% 5.76%
Maximum month-end balance during the year................... $97,416 $279,909
Balance at year-end......................................... $57,581 $279,909
Private issuer mortgage-backed securities underlying the
agreements as of the end of the year:
Carrying value, including accrued interest............. $61,418 $295,556
Estimated market value................................. $61,426 $295,500
</TABLE>
The securities sold under the repurchase agreements at December 31, 1997
are due in less than one year. The Company enters into sales of securities under
agreements to repurchase the same securities. Repurchase agreements are
collateralized by fixed and variable rate mortgage-backed securities or
investment grade securities. 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 repurchase agreements. If the counterparty in a
repurchase agreement was to fail, the Company may incur an accounting loss for
the excess collateral posted with the counterparty. As of December 31, 1997,
Lehman Brothers Inc. represents the only counterparty with which the Company's
amount at risk exceeded 10% of the Company's stockholders' equity. The amount of
risk at December 31, 1997 with Lehman Brothers Inc. was $5.1 million with a
weighted average maturity of 47 days.
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 40 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 equal to 100% of the
Company's annual interest expense on all indebtedness, restricts disposition of
the Bank or its assets, and limits transactions with affiliates. The annual
interest expense to service the subordinated debt is $2.0 million.
The total value of the 690,000 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 $3.828.
On February 28, 1997, the Company sold $29.9 million of units in the form
of 4% convertible preferred stock and 9.5% senior subordinated notes and
warrants to investment partnerships managed by Conning & Co., CIBC Wood Gundy
Argosy Merchant Fund 2, LLC, General American Life Insurance Company, The
Progressive Corporation, and The Northwestern Mutual Life Insurance Company.
Upon the
F-19
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 396,176 detachable warrants,
$16.2 million in 4.0% convertible preferred stock, and rights to 411,126
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 $4.75 with an expiration
date of February 28, 2005. The preferred stock consists of Series A Voting
Convertible Preferred Stock, Series B Nonvoting Convertible Preferred Stock, and
Series C Nonvoting Convertible Preferred Stock and is convertible to 2,399,486
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
aforementioned preferred stock has no liquidation preferences. The contingent
warrants may be exercised upon a change of control or at any time after February
19, 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
reached. The annual interest expense to service the senior subordinated notes is
$1.3 million and the annual dividend requirement on the preferred stock is
$648,000.
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%, or $1.1 million, payable semi-annually, beginning in
December 1997. The net proceeds will be used, for general corporate purposes,
including to fund Bank operations and the creation and expansion of its
financial service and product operations.
13. EARNINGS PER 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.
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. Diluted earnings per
common share for the years ended December 31, 1995, 1996, and 1997 were
determined on the assumptions that the dilutive options and warrants were
exercised upon issuance. The options and warrants are deemed to be dilutive if
(a) the average market price of the related common stock for a period exceeds
the exercise price or (b) the security to be tendered is selling at a price
below that at which it may be tendered under the option or warrant agreement and
the resulting discount is sufficient to establish an effective exercise price
below the market price of the common stock obtainable upon exercise. The
Company's year to date weighted average number of common shares outstanding was
4,099,000 at December 31, 1995 and 1996 and 4,382,910 at December 31, 1997. For
diluted earnings per share computation, weighted average shares outstanding also
include potentially dilutive securities.
F-20
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EPS CALCULATION
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
FOR THE YEAR ENDED DECEMBER
31, 1995
---------------------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Basic earnings per share
Net income.................................................. $2,720 4,099 $0.66
=====
Options issued to management................................ -- 5
------ -----
Diluted earnings per share.................................. $2,720 4,104 $0.66
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
---------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income.................................................. $2,552 4,099 $0.62
=====
Options issued to management................................ -- 182
Warrants.................................................... -- 125
------ -----
Diluted earnings per share.................................. $2,552 4,406 $0.58
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
---------------------------
<S> <C> <C> <C>
Net income.................................................. $4,217
Less: preferred stock dividends............................. (546)
------
Basic earnings per share
Income available to common shareholders..................... $3,671 4,383 $0.84
=====
Options issued to management................................ -- 510
Warrants.................................................... -- 501
Convertible preferred stock................................. 546 2,017
------ -----
Diluted earnings per share.................................. $4,217 7,411 $0.57
====== ===== =====
</TABLE>
14. INCOME TAXES
Income tax expense for the years ended December 31, 1995, 1996, and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current: Federal........................................... $2,038 $1,194 $1,881
State............................................. 181 225 221
------ ------ ------
2,219 1,419 2,102
Deferred: Federal........................................... (474) (78) (398)
State............................................. (85) (146) (47)
------ ------ ------
(559) (224) (445)
Total: Federal........................................... 1,564 1,116 1,483
State............................................. 96 79 174
------ ------ ------
$1,660 $1,195 $1,657
====== ====== ======
</TABLE>
F-21
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1995, 1996, and 1997
is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
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................................................... (7.0) (3.6) (5.8)
Other....................................................... 6.7 (2.7) (6.0)
---- ---- ----
37.9% 31.9% 26.4%
==== ==== ====
</TABLE>
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 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Acquired Loan Servicing Rights......................... $ (12) $ --
Purchase Accounting Premium............................ (40) (75)
Depreciation........................................... (17) (44)
Tax Reserve in Excess of Base Year..................... (93) (134)
Tax Effect of Securities Available-for-sale Adjustment
to Fair Value (notes 4 and 5)......................... (1,030) (722)
FHLB Stock Dividends................................... (168) (129)
Other.................................................. (52) (89)
------- -------
Total............................................. (1,412) (1,193)
Deferred Tax Assets:
General Reserves & Real Estate Owned Losses............ 819 1,293
Other.................................................. 20 80
------- -------
Total............................................. 839 1,373
------- -------
Net Deferred Tax Asset (Liability).......................... $ (573) $ 180
======= =======
</TABLE>
The Company has a tax bad debt base year reserve of $264,000 for which
income taxes have not been provided. Certain distributions or transactions may
cause the Bank to recapture its tax bad debt base year reserve, resulting in
taxes of $100,000. 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.
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.
F-22
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate exchange agreements for the years ended December 31, 1996 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average fixed rate payments........................ 5.97% 6.15%
Weighted average original term.............................. 5.0 yrs 4.6 yrs
Weighted average variable rate obligation................... 5.62% 5.81%
Notional amount............................................. $130,000 $205,000
</TABLE>
The Company enters into interest rate cap agreements to hedge outstanding
FHLB advances and 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):
<TABLE>
<CAPTION>
EFFECTIVE NOTIONAL MATURITY
CAP STRIKE RATE DATE BALANCE DATE
--------------- ------------- -------- -------------
<S> <C> <C> <C>
4%........................................ July 1992 $10,000 July 1999
6%........................................ October 1996 $20,000 October 1999
7%........................................ January 1997 $10,000 January 2002
7%........................................ January 1995 $10,000 July 1998
7.5%....................................... July 1997 $25,000 July 1999
8%........................................ July 1997 $25,000 July 2000
8%........................................ June 1997 $25,000 June 2000
9%........................................ December 1994 $14,000 December 1998
10%....................................... April 1995 $10,000 January 2002
</TABLE>
The counterparties to the interest rate cap agreements are Goldman Sachs,
Lehman Brothers, Merrill Lynch, NationsBank, Nomura, Salomon Brothers, and UBS.
As of December 31, 1997, the associated credit risk with the aforementioned
counterparties are $332,000, $104,000, $117,000, $66,000, $30,000, $132,000, and
$605,000, respectively. The credit risk is attributable to the unamortized cap
premium and any amounts due from the counterparty as of December 31,1997. The
total amortization expense for premiums on interest rate caps was $213,000,
$638,000, and $777,000 for the years ended December 31, 1995, 1996, and 1997,
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 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.
F-23
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
SUBORDINATED 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 1997 is
as follows:
<TABLE>
<CAPTION>
1996 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents...................... $ 3,259 $ 3,259 $ 92,156 $ 92,156
Investment securities available-for-sale....... 78,826 78,826 91,237 91,237
Mortgage-backed securities
available-for-sale........................... 184,743 184,743 319,203 319,203
Loans receivable............................... 351,821 365,401 540,704 562,270
Trading........................................ -- -- 21,110 21,110
Liabilities:
Deposits....................................... $390,486 $393,820 $522,221 $524,022
Advances from the FHLB Atlanta................. 144,800 144,800 200,000 200,000
Securities sold under agreements to
repurchase................................... 57,581 57,581 279,909 279,909
Subordinated debt, net......................... 16,586 16,625 29,614 30,953
Trust preferred................................ -- -- 9,572 10,000
Off-balance sheet instruments.................. -- 1,684 -- (1,342)
Commitments to purchase loans.................. -- -- -- --
</TABLE>
F-24
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. DISTRIBUTIONS
The Bank is subject to certain restrictions on the amount of dividends it
may declare without prior regulatory approval. At December 31, 1997,
approximately $10.6 million of retained earnings were available for dividend
declaration.
18. 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 1997, the Company carried a
$305,000 note receivable from the ESOP which was collateralized by the Company's
common stock. The ESOP owned 135,200 shares of the Company's stock with
approximately 64,000 and 78,000 shares vested at December 31, 1996 and 1997,
respectively. The Company's contribution to the ESOP, which is reflected in
compensation expense, was $210,000, $224,000 and $247,000 for the years ended
December 31, 1995, 1996, and 1997, respectively.
19. STOCK BASED COMPENSATION
In 1996, officers and employees were issued 161,000 options to purchase
161,000 shares of TeleBanc common stock at prices ranging from $3.875 to
$4.4375. In 1997, the Company authorized and issued 698,402 options to
directors, officers and employees to purchase 698,402 shares of TeleBanc common
stock at prices ranging from $1.33 to $6.75. As of December 31, 1996 and 1997,
360,876 and 598,248 of the shares, respectively, were vested at exercise prices
ranging from $1.33 to $6.25. The maximum term for the outstanding options is 10
years. As of December 31, 1997, the total number of authorized options is
1,802,862. The options' exercise price was the market value of the stock at the
date of issuance.
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000'S) PRICE (000'S) PRICE (000'S) PRICE
------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................. 484 $3.32 542 $3.26 704 $ 3.45
Granted.......................................... 64 2.75 162 4.09 698 6.26
Exercised........................................ -- -- -- -- 34 3.26
Forfeited........................................ 6 3.07 -- -- 38 5.70
Outstanding at end of year....................... 542 3.26 704 3.45 1,330 4.86
Options exercisable at year-end.................. 220 3.28 360 3.35 598 4.03
Weighted avg. fair value of options granted...... 0.91 1.31 1.75
</TABLE>
F-25
<PAGE> 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about fixed options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING (000'S)
----------------------------------------------- OPTIONS EXERCISABLE (000'S)
WEIGHTED AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Less than $2.50........ 48 9.2 $1.33 10 $1.33
$2.50 - $3.74.......... 510 6.5 $3.275 404 $3.285
$3.75 - $4.99.......... 148 8.3 $4.105 60 $4.105
$5.00 - $6.24.......... -- -- -- -- --
$6.25 - $7.49.......... 624 9.2 $6.615 124 $6.615
----- ---
Less than
$2.50 - $7.49........ 1,330 8.0 $4.86 598 $4.03
===== ===
</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 6.00%, 5.25%, and 5.08% for
1995, 1996, and 1997, respectively; expected life of 10 years for all options
granted in 1995, 1996, and 1997; expected volatility of 16%, 23%, and 25% for
1995, 1996, and 1997, respectively.
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 DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported.................................... $2,720 $2,552 $3,671
Pro forma...................................... $2,684 $2,409 $2,629
Basic earnings per share:
As reported.................................... $ 0.66 $ 0.62 $ 0.84
Pro forma...................................... $ 0.66 $ 0.59 $ 0.60
Diluted earnings per share:
As reported.................................... $ 0.66 $ 0.58 $ 0.57
Pro forma...................................... $ 0.66 $ 0.55 $ 0.43
</TABLE>
20. 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, 1997, 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 $127,000, $142,000, and $238,000 for the
years ended December 31, 1995, 1996, and 1997, respectively.
F-26
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The projected minimum rental payments under the terms of the lease are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1998..................................................... $ 190,000
1999..................................................... 165,000
2000..................................................... 166,000
2001..................................................... 167,000
2002..................................................... 168,000
2003 and thereafter...................................... 267,000
----------
$1,123,000
==========
</TABLE>
As of December 31, 1997, the Company had commitments to purchase $24.0
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 1997, there
was no reserve needed for incurred but not reported claims under this insurance
arrangement.
21. SUBSEQUENT EVENTS
In the first quarter of 1998, TeleBanc signed a definitive merger agreement
(the "DFC Acquisition") to acquire Direct Financial Corporation ("DFC"). DFC is
the parent holding company of Premium Bank, a federal savings bank headquartered
in New Jersey. At December 31, 1997, DFC reported total assets of $326.1
million, loans receivable, net of $187.2 million, total deposits of $273.9
million and total stockholders' equity of $12.3 million. TeleBanc will pay $12
for each share of Direct Financial common stock or common stock equivalent. The
transaction is valued at approximately $26.4 million. The DFC Acquisition is
expected to be consummated in the summer of 1998, subject to regulatory
approvals.
Also in January 1998, TeleBanc announced that it had signed a definitive
acquisition agreement whereby MET Holdings will sell substantially all of its
assets, including approximately 2,866,162 shares of TeleBanc Common Stock owned
by MET Holdings, and assign substantially all of its liabilities, to TeleBanc.
Immediately following consummation of the acquisition, MET Holdings will
dissolve and distribute its remaining assets and liabilities to its
stockholders, assuming such dissolution is approved by the requisite number of
stockholders of MET Holdings and TeleBanc.
F-27
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash................................................... $ 159 $ 5,401
Investment securities available-for-sale............... 4,132 4,186
Mortgage-backed securities available-for-sale.......... 14,086 26,219
Loans receivable, net.................................. 305 566
Loan receivable held for sale.......................... -- 6,367
Trading................................................ -- 14,011
Equity in net assets of subsidiary..................... 34,130 58,976
Deferred charges....................................... 940 1,460
Other assets........................................... 1,099 4,806
------- --------
Total assets...................................... $54,851 $121,992
======= ========
Liabilities and Stockholders' Equity
Liabilities:
Subordinated debt...................................... $16,586 $ 39,614
Securities sold under agreements to repurchase......... 12,831 33,555
Accrued interest payable............................... 357 1,037
Taxes payable and other liabilities.................... 419 1,962
------- --------
Total liabilities................................. $30,193 $ 76,168
------- --------
Stockholders' Equity
Preferred Stock........................................ $ -- $ 15,281
Common Stock........................................... 20 22
Additional Paid-in-Capital............................. 14,637 16,207
Retained earnings...................................... 7,905 11,576
Unrealized gain/loss on securities
available-for-sale.................................... 2,096 2,738
------- --------
Total stockholders' equity........................ 24,658 45,824
------- --------
Total liabilities and stockholders' equity........ $54,851 $121,992
======= ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Interest income............................................. $ 429 $ 531 $ 2,683
Interest expense............................................ 2,111 2,163 4,352
------- ------- -------
Net interest loss........................................... (1,682) (1,632) (1,669)
Non interest income......................................... 92 133 13
Total general and administrative expenses................... 1,046 1,393 1,288
Non interest expenses....................................... 126 127 195
------- ------- -------
Net loss before equity in net income of subsidiary and
income taxes.............................................. (2,762) (3,019) (3,139)
Equity in net income of subsidiary.......................... 4,434 6,716 5,668
Income taxes................................................ (1,048) 1,145 (1,688)
Preferred stock dividend.................................... -- -- 546
------- ------- -------
Net income.................................................. $ 2,720 $ 2,552 $ 3,671
======= ======= =======
</TABLE>
F-28
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income............................................. $ 2,720 $ 2,552 $ 4,217
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries....... (4,434) (4,426) (5,668)
Purchases of loans held for sale....................... -- -- (6,367)
Net increase in trading securities..................... -- -- (14,011)
(Increase) decrease in other assets.................... 38 (686) (4,227)
Increase in accrued expenses and other liabilities..... 122 267 2,223
-------- --------- --------
Net cash provided by operating activities................... (1,554) (2,293) (23,833)
-------- --------- --------
Cash flows from investing activities:
Net (increase) decrease in loan to Employee Stock
Ownership Plan....................................... 60 (65) --
Net increase in loans.................................. -- -- (261)
Net (increase) decrease in equity investments.......... 2,089 2,074 (19,178)
Purchases of available-for-sale securities............. (20,771) (100,574) (92,862)
Proceeds from sale of available-for-sale securities.... 5,170 11,103 80,159
Proceeds from maturities of and principal payment on
available-for-sale securities........................ 14,619 76,910 1,158
Net sales (purchases) of premises and equipment........ (21) (37) --
-------- --------- --------
Net cash (used in) provided by investing activities......... 1,146 (10,589) (30,984)
-------- --------- --------
Cash flows from financing activities:
Net increase in securities sold under agreements to
repurchase........................................... -- 12,831 20,724
Increase in subordinated debt.......................... -- -- 23,028
Increase in common stock and additional
paid-in-capital...................................... -- -- 16,853
Dividends paid on common and preferred stock........... -- -- (546)
-------- --------- --------
Net cash provided by financing activities................... -- 12,831 60,059
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (408) (51) 5,242
-------- --------- --------
Cash and cash equivalents at beginning of period............ 618 210 159
-------- --------- --------
Cash and cash equivalents at end of period.................. $ 210 $ 159 $ 5,401
======== ========= ========
</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 $992,000 to TeleBanc for subordinated
interest expense payments for the years ended December 31, 1996 and 1997,
respectively.
F-29
<PAGE> 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data for the years ended December 31, 1997
and 1996 is shown as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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 operating 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
======= ======= ======= =======
Basic earnings per share................................ $ 0.16 $ 0.19 $ (0.02) $ 0.30
Diluted earnings per share.............................. $ 0.16 $ 0.18 $ (0.02) $ 0.26
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income......................................... $12,837 $15,275 $14,821 $16,368
Interest expense........................................ 9,878 11,865 11,548 12,772
------- ------- ------- -------
Net interest income................................ 2,959 3,410 3,273 3,596
Provision for loan and lease losses..................... 243 308 120 250
Non-interest income..................................... 607 1,244 1,084 1,158
General and administrative expenses..................... 1,897 2,251 2,078 2,816
Other non-interest operating expenses................... 208 202 260 430
------- ------- ------- -------
Income before income taxes and minority interest... 1,218 1,893 1,899 1,258
------- ------- ------- -------
Income tax expense...................................... 355 618 709 (25)
Minority interest in subsidiary......................... -- 67 285 42
------- ------- ------- -------
Net income.............................................. 863 1,208 905 1,241
Preferred stock dividends............................... 60 162 162 162
------- ------- ------- -------
Net income after preferred stock dividends......... $ 803 $ 1,046 $ 743 $ 1,079
======= ======= ======= =======
Basic earnings per share................................ $ 0.19 $ 0.24 $ 0.16 $ 0.24
Diluted earnings per share.............................. $ 0.15 $ 0.16 $ 0.11 $ 0.16
</TABLE>
F-30
<PAGE> 104
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Financial Condition -- As of
December 31, 1997 and March 31, 1998...................... F-32
Consolidated Statements of Operations -- For the Three
Months Ended March 31, 1997 and 1998...................... F-33
Consolidated Statements of Changes in Stockholders'
Equity -- For the Three Months Ended March 31, 1997 and
1998...................................................... F-34
Consolidated Statements of Cash Flows -- For the Three
Months Ended March 31, 1997 and 1998...................... F-35
Notes to Consolidated Financial Statements -- For the Three
Months Ended March 31, 1997 and 1998...................... F-36
</TABLE>
F-31
<PAGE> 105
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 92,156 $ 31,559
Trading securities.......................................... 21,110 42,129
Investment securities available-for-sale.................... 91,237 123,963
Mortgage-backed securities available-for-sale............... 319,203 260,152
Loans receivable, net....................................... 391,618 418,676
Loans receivable held-for-sale.............................. 149,086 138,381
Other assets................................................ 35,942 33,293
---------- ----------
Total assets........................................... $1,100,352 $1,048,153
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Retail deposits............................................. $ 522,221 $ 560,554
Brokered callable certificates of deposit................... -- 42,286
Advances from the Federal Home Loan Bank of Atlanta......... 200,000 190,000
Securities sold under agreements to repurchase.............. 279,909 153,970
Subordinated debt, net...................................... 29,614 29,672
Other liabilities........................................... 13,212 15,605
---------- ----------
Total liabilities...................................... 1,044,956 992,087
---------- ----------
Corporation-Obligated Mandatorily Redeemable Capital
Securities of
Subsidiary Trust Holding Soley Junior Subordinated
Debentures of the
Corporation............................................... 9,572 9,526
Stockholders' Equity:
4% Cumulative preferred stock, $0.01 par value, 500,000
shares authorized
Series A, 18,850 issued and outstanding................ 9,634 9,634
Series B, 4,050 issued and outstanding................. 2,070 2,070
Series C, 7,000 issued and outstanding................. 3,577 3,577
Common stock, $0.01 par value, 29,500,000 shares authorized;
4,484,988 and 4,458,322 issued and outstanding at March
31, 1998 and December 31, 1997............................ 22 22
Additional paid-in-capital.................................. 16,207 16,387
Retained earnings........................................... 11,576 11,850
Accumulated other comprehensive income, net of tax.......... 2,738 3,000
---------- ----------
Total stockholders' equity............................. 45,824 46,540
---------- ----------
Total liabilities and stockholders' equity............. $1,100,352 $1,048,153
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 106
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Interest income:
Loans................................................... $ 7,557 $10,365
Mortgage-backed and related securities.................. 3,805 5,074
Investment securities................................... 1,444 1,786
Trading securities...................................... -- 636
Other................................................... 31 210
------- -------
Total interest income.............................. 12,837 18,071
------- -------
Interest expense:
Retail deposits......................................... 5,705 8,055
Brokered callable certificates of deposit............... -- 374
Advances from the Federal Home Loan Bank of Atlanta..... 2,073 2,718
Repurchase agreements................................... 1,457 2,451
Subordinated debt....................................... 643 879
------- -------
Total interest expense............................. 9,878 14,477
------- -------
Net interest income................................ 2,959 3,594
Provision for loan losses............................... 243 250
------- -------
Net interest income after provision for loan
losses............................................ 2,716 3,344
------- -------
Non-interest income:
Gain on sale of securities.............................. 238 891
Gain on sale of loans................................... 127 121
Gain on trading securities.............................. 23 62
Gain (loss) on equity investment........................ (109) 526
Fees, service charges, and other........................ 339 347
------- -------
Total non-interest income.......................... 618 1,947
------- -------
Non-interest expenses:
Selling, general and administrative expenses:
Compensation and employee benefits................. 1,176 1,950
Other.............................................. 721 1,939
------- -------
Total selling, general and administrative
expenses.......................................... 1,897 3,889
------- -------
Other non-interest expenses:
Net operating costs of real estate acquired through
foreclosure............................................ 74 82
Amortization of goodwill and other intangibles.......... 134 233
------- -------
Total other non-interest expenses....................... 208 315
------- -------
Total non-interest expenses............................. 2,105 4,204
------- -------
Income before income tax expense................... 1,229 1,087
Income tax expense................................. 355 475
Minority interest in subsidiary.................... -- 176
------- -------
Net income......................................... $ 874 $ 436
======= =======
Preferred stock dividends.......................... 60 162
------- -------
Net income available to common stockholders........ $ 814 $ 274
======= =======
Other comprehensive income, before tax:
Unrealized holding gain (loss) on securities arising
during the period...................................... (1,017) 814
Less: reclassification adjustment for gains included in
net income............................................. (238) (891)
------- -------
Other comprehensive income, before tax...................... (1,255) (77)
Income tax expense related to reclassification adjustment
for gains on sale of securities........................... 90 339
------- -------
Other comprehensive income, net of tax...................... (1,165) 262
------- -------
Comprehensive income........................................ $ (351) $ 536
======= =======
Earnings per share:
Basic................................................... $ 0.19 $ 0.06
Diluted................................................. $ 0.15 $ 0.05
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 107
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED COMMON PAID-IN RETAINED INCOME (LOSS),
STOCK STOCK CAPITAL EARNINGS NET OF TAX TOTAL
--------- ------ ---------- -------- -------------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996..... $ -- $20 $14,637 $ 7,905 $ 2,096 $24,658
Net income for the three months
ended March 31, 1997............ -- -- -- 874 -- 874
Stock issued...................... -- 2 1,272 -- -- 1,274
Issuance of 4% Cumulative
Preferred Stock, Series A....... 9,634 -- -- -- -- 9,634
Issuance of 4% Cumulative
Preferred Stock, Series B....... 2,070 -- -- -- -- 2,070
Issuance of 4% Cumulative
Preferred Stock, Series C....... 3,577 -- -- -- -- 3,577
Dividends on 4% Cumulative
Preferred Stock................. -- -- -- (60) -- (60)
Unrealized loss on available for
sale securities, net of tax
effect.......................... -- -- -- -- (1,165) (1,165)
------- --- ------- ------- ------- -------
Balances at March 31, 1997........ $15,281 $22 $15,909 $ 8,719 $ 931 $40,862
======= === ======= ======= ======= =======
Balances at December 31, 1997..... $15,281 $22 $16,207 $11,576 $ 2,738 $45,824
Net income for the three months
ended March 31, 1998............ -- -- -- 436 -- 436
Stock issued...................... -- -- 180 -- -- 180
Dividends on 4% Cumulative
Preferred Stock................. -- -- -- (162) -- (162)
Unrealized gain on available for
sale securities, net of tax
effect.......................... -- -- -- -- 262 262
------- --- ------- ------- ------- -------
Balances at March 31, 1998........ $15,281 $22 $16,387 $11,850 $ 3,000 $46,540
======= === ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 108
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Net cash (used by) provided by operating activities......... $ 4,650 $ (4,776)
--------- ---------
Cash flows from investing activities:
Net increase in loans.................................. (84,134) (26,002)
Purchases of available-for-sale securities............. (124,251) (143,899)
Proceeds from sale of available-for-sale securities.... 10,640 151,543
Proceeds from maturities of and principal payments on
available-for-sale securities......................... 70,321 18,419
Proceeds from sale of foreclosed real estate........... 259 494
Equity investment in subsidiaries...................... (700) (724)
Net purchases of premises and equipment................ (277) (226)
--------- ---------
Net cash used in investing activities....................... $(128,142) $ (395)
--------- ---------
Cash flows from financing activities:
Net increase in deposits............................... 4,517 80,619
Net increase in subordinated debt...................... 12,858 --
Increase in advances from Federal Home Loan Bank of
Atlanta............................................... 107,000 87,500
Payment on advances from Federal Home Loan Bank of
Atlanta............................................... (86,800) (97,500)
Net increase in borrowed funds......................... -- 52
Net (decrease) increase in securities sold under
agreements to repurchase.............................. 74,685 (125,939)
Increase in common stock, preferred stock, and
additional paid-in capital............................ 16,555 180
Interest paid to minority interest in subsidiary....... -- (176)
Dividends paid on common and preferred stock........... (60) (162)
--------- ---------
Net cash (used in) provided by financing activities......... $ 128,755 $ (55,426)
--------- ---------
Net (decrease) increase in cash and cash equivalents........ 5,263 (60,597)
Cash and cash equivalents at beginning of period............ 3,259 92,156
--------- ---------
Cash and cash equivalents at end of period.................. $ 8,522 $ 31,559
========= =========
Supplemental information:
Interest paid on deposits and borrowed funds................ $ 8,647 $ 13,692
Income taxes paid........................................... 260 242
Gross unrealized gain (loss) on securities
available-for-sale........................................ (1,638) 465
Tax effect of gain (loss) on available-for-sale
securities................................................ (473) 203
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company operates its business principally through two wholly owned
subsidiaries, TeleBank, a federally chartered savings bank ("TeleBank"), and
TeleBanc Capital Markets, Inc. ("TCM"). TeleBank offers savings and investment
products insured up to applicable limits by the Federal Deposit Insurance
Corporation (the "FDIC"), and TCM is a registered broker-dealer and investment
advisor specializing in one-to-four family mortgage loans and mortgage-backed
securities. TCM manages the portfolios of TeleBanc Financial and TeleBank. The
Company also owns all of the beneficial interests represented by common
securities in a Delaware trust, TeleBanc Capital Trust I ("TCT I"), which was
formed solely for the purpose of issuing capital securities. In 1997, TCT I
issued $10.0 million 11.0% Capital Securities, Series A and invested the net
proceeds in the Company's 11.0% Junior Subordinated Deferrable Interest
Debentures, Series A (the "TCT I Junior Subordinated Debentures"). TeleBank,
through its wholly owned subsidiary TeleBanc Servicing Corporation ("TSC"), owns
50% of 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. The
accompanying consolidated financial statements include the accounts of TeleBank,
TCM, TCT, and TSC, a wholly owned subsidiary of the bank. All significant
intercompany transactions and balances are eliminated in consolidation. The
investment, $2.9 million, in AGT PRA is accounted for under the equity method.
The financial statements as of March 31, 1998 and for the three months
ended March 31, 1998 and 1997 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 March 31,
1998 and the results of consolidated operations for the three months ended March
31, 1998 and 1997. The results of consolidated operations for the three months
ended March 31, 1998 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, 1997, included in the Company's Annual Report to
Stockholders for 1997, should be read in conjunction with these statements.
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
Effective January 1, 1998, PRA changed its method of accounting from the
cost recovery method to the installment method, resulting in income of $547,000.
This change is not expected to have a material effect on the full year's results
of operations.
2. EARNINGS PER SHARE
Basic earnings per common share, as required by Statement of Financial
Accounting Standards No. 128, is computed by dividing adjusted net income by the
total of the weighted average number of common shares outstanding during the
respective periods. Diluted earnings per common share for the quarters ended
March 31, 1998 and 1997 were determined on the assumptions that the dilutive
options and warrants were exercised upon issuance. The options and warrants are
deemed to be dilutive if (a) the average market price of the related common
stock for a period exceeds the exercise price or (b) the security to be tendered
is selling at a price below that at which it may be tendered under the option or
warrant agreement and the resulting discount is sufficient to establish an
effective exercise price below the market price of the common stock obtainable
upon exercise. The Company's quarter to date weighted average number of common
shares outstanding was 4,467,610 at March 31, 1998 and 4,212,176 at March 31,
1997. For diluted earnings per share computation, weighted average shares
outstanding also include potentially dilutive securities.
F-36
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EPS CALCULATION
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
--------- --------- ---------
FOR THE THREE MONTHS ENDED
MARCH 31, 1997
---------------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income.................................................. $ 813,755 4,212,176 $0.19
=====
Options issued to management................................ -- 380,102
Warrants.................................................... -- 362,016
Convertible preferred stock................................. 60,287 835,776
--------- ---------
Diluted earnings per share.................................. $ 874,042 5,790,070 $0.15
========= ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1998
---------------------------------
<S> <C> <C> <C>
Net income.................................................. $ 436,408
Less: preferred stock dividends............................. (161,965)
---------
Basic earnings per share
Income available to common shareholders..................... $ 274,443 4,467,610 $0.06
=====
Options issued to management................................ -- 666,360
Warrants.................................................... -- 623,012
Convertible preferred stock................................. -- --
--------- ---------
Diluted earnings per share.................................. $ 274,443 5,756,982 $0.05
========= ========= =====
</TABLE>
3. RECENT EVENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), effective for fiscal years beginning after December 15, 1997. This
statement requires that certain financial activity typically disclosed in
stockholders' equity be reported in the financial statements as an adjustment to
net income in determining comprehensive income. The Company adopted SFAS 130
effective January 1, 1998. As a result, comprehensive income for the periods
ending March 31, 1998 and 1997 are reported in the Consolidated Statement of
Operations.
Consistent with its operating strategy, the Company has signed an agreement
to acquire DFC, a thrift holding company and its federally chartered savings
bank subsidiary, Premium Bank, in a transaction expected to be consummated in
the third quarter of 1998, subject to regulatory approval. TeleBanc Financial is
acquiring DFC because DFC has employed a direct marketing strategy similar to
that of the Company, and thus presents the opportunity for the Company to
acquire the deposits and customers of a financial institution without acquiring
significant infrastructure. DFC currently operates from a single branch in New
Jersey located outside of Philadelphia, Pennsylvania, and its customer and
deposit base is concentrated in the Mid-Atlantic region of the United States.
The Company does intend to retain a significantly scaled down portion of DFC's
employees and intends to close DFC's single branch location. The Company may
open a regional business development office in the location of the former DFC
branch. DFC also originates residential mortgage loans, although the Company
intends to discontinue mortgage loan origination upon its acquisition of DFC.
DFC also offers credit cards to its customers through a relationship with First
Data Resources and Card Management Services. In 1998, in reliance upon DFC's
existing credit card relationships, the Company also intends to offer its
customers co-branded credit cards.
At March 31, 1998, DFC reported total assets of $320.3 million, loans
receivable, net of $181.2 million, total deposits of $288.7 million and total
stockholders' equity of $12.3 million. TeleBanc will pay approxi-
F-37
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mately $21.4 million in the transaction, and will assume approximately $6
million in liabilities which the Company intends to repay at the time the
transaction is consummated.
In April 1998, the shareholders of TeleBanc and MET Holdings ("MET") voted
to approve and adopt the Amended and Restated Acquisition Agreement, dated as of
March 17, 1998. Subsequently, TeleBanc completed the acquisition of MET whereby
MET sold substantially all of its assets, including 2,866,162 shares of TeleBanc
common stock owned by MET, and assigned substantially all of its liabilities to
TeleBanc in exchange for 2,876,162 shares of TeleBanc common stock.
F-38
<PAGE> 112
[Graphic on inside back cover shows a picture of the Company's Web site with a
graph superimposed on the lower right corner showing deposit and account growth
from 1993 to 1997]
<PAGE> 113
[TELEBANK LOGO]
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be incurred by TeleBanc
Financial Corporation (the "Registrant") in connection with the issuance and
distribution of the securities registered hereby, all of which expenses, except
for the registration fee and the Nasdaq National Market filing fee, are
estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 11,800
Nasdaq National Market application and listing fees......... 48,750
NASD filing fee............................................. 4,500
Printing expenses........................................... 127,500
Legal fees and expenses (other than Blue Sky)............... 212,500
Accounting fees and expenses................................ 153,000
Blue Sky legal fees and filing expenses (including fees of
counsel).................................................. 10,000
Transfer agent fees and expenses............................ 1,500
Miscellaneous expenses...................................... 55,450
--------
Total............................................. $625,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may limit the liability of each director to the corporation
or its stockholders for monetary damages, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders;
(ii) for acts of omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain unlawful
dividend payments or stock redemption or repurchases; and (iv) for any
transaction from which the director derived and improper benefit. The
Certificate of Incorporation of the Registrant provides for the elimination and
limitation of the personal liability of directors of the Registrant for monetary
damages to the fullest extent permitted by the DGCL. Article Eight of the
Registrant's Bylaws, entitled "Indemnification," provides for indemnification of
the Registrant's directors, officers, employees and agents under certain
circumstances.
In addition, the Certificate of Incorporation provides that if the DGCL is
amended to authorized the further elimination or limitation of a director, then
the liability of the directors of the Registrant shall be eliminated or limited
to the fullest extent permitted by the DGCL, as so amended. The effect of this
provision is to eliminate the right of the Registrant and its stockholders
(through stockholders' derivative suits on behalf of the Registrant to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
The provision does not limit or eliminate the rights of the Registrant or any
stockholder to seek non-monetary relief such as an injunction or recission in
the event of a breach of a director's duty of care. In addition, the Certificate
of Incorporation provides that the Registrant shall, to the fullest extent
permitted by the DGCL, as amended from time to time, indemnify each or its
currently acting and former directors, officers, employees and agents.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1 Form of Underwriting Agreement
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant
3.1(b) Certificate of Designations (incorporated by reference
herein to Exhibit 3 to the Registrant's Current Report on
Form 8-K, dated March 17, 1997)
</TABLE>
II-1
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
3.2 Bylaws of the Registrant (incorporated by reference herein
to Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, dated March 31,
1997)
4.1 Specimen certificate evidencing shares of Common Stock of
the Registrant (incorporated by reference herein to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1,
dated March 25, 1994, File No. 33-76930)
4.2 Form of warrant for the purchase of shares of Common Stock,
issued in connection with the Unit Purchase Agreement, dated
February 19, 1997, among the Registrant and the Purchasers
identified therein (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
dated March 17, 1997)
4.3 Form of warrant for the purchase of shares of Common Stock,
issued in connection with the units of warrants and
subordinated debt sold in the Registrant's initial public
offering (incorporated by reference herein to Exhibit 4.5 to
the Registrant's Registration Statement on Form S-1, dated
March 25, 1994, File No. 33-76930)
4.4 Declaration of Trust of TeleBanc Capital Trust II, dated May
22, 1998
4.5 Form of Certificate of Exchange Junior Subordinated
Debentures (incorporated by reference herein to Exhibit 4.3
to the Registrant's Form 10-K/A for the year ended December
31, 1997, dated April 2, 1998)
4.6 Amended and Restated Declaration of Trust of TeleBanc
Capital Trust I, dated June 9, 1997 (incorporated by
reference herein to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.7 Certificate of Trust of TeleBanc Capital Trust II, dated May
22, 1998
4.8 Form of Exchange Capital Security Certificate (incorporated
by reference herein to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.9 Exchange Guarantee Agreement by the Registrant for the
benefit of the holders of Exchange Capital Securities
(incorporated herein by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form S-4, dated
December 8, 1997, File No. 333-40399)
5 Form of opinion of Shaw Pittman Potts & Trowbridge as to the
legality of the securities being registered
10.1 1994 Stock Option Plan (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.2 1997 Stock Option Plan (incorporated by reference herein to
Exhibit D to the Registrant's definitive proxy materials
which were filed as Exhibit 99.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996,
dated March 31, 1997)
10.3 1998 Stock Incentive Plan
10.4 Employee Stock Ownership Plan of the Registrant
10.5* Agreement and Plan of Merger by and between the Registrant
and Direct Financial Corporation, dated January 14, 1998
10.6 Registration Rights Agreement, dated June 5, 1997, among the
Registrant, TeleBanc Capital Trust I and the Initial
Purchaser (incorporated by reference herein to Exhibit 4.8
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399)
10.7 Unit Purchase Agreement, dated February 19, 1997, among the
Registrant and the Purchasers identified therein
(incorporated by reference herein to Exhibit 10.1 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
</TABLE>
II-2
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
10.8 Amended and Restated Acquisition Agreement, dated February
19, 1997, among the Registrant, Arbor Capital Partners,
Inc., MET Holdings, Inc., and William M. Daugherty
(incorporated by reference herein to Exhibit 10.2 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.9 Liquidated Damages Agreement, dated June 9, 1997, by and
among the Registrant, TeleBanc Capital Trust I, and the
Initial Purchaser (incorporated by reference herein to
Exhibit 4.9 to the Registrant's Registration Statement on
Form S-4, dated December 8, 1997, File No. 333-40399)
10.10 Tax Allocation Agreement, dated April 7, 1994, between
TeleBank and Registrant (incorporated by reference herein to
Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, dated May 3, 1994, File
No. 33-76930)
10.11* Indenture dated June 9, 1997, between the Registrant and
Wilmington Trust Company, as debenture trustee (incorporated
by reference herein to the Registrant's Registration
Statement on Form S-4, dated December 8, 1997, File No.
333-40399)
10.12 Form of Indenture between the Registrant and Wilmington
Trust Company as Trustee (incorporated by reference herein
to Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.13 Conversion Agreement dated May 15, 1998 by and among the
Registrant and certain investors named therein
11* Statement regarding calculation of net income per share
21 Subsidiaries of the Registrant
23.1 Consent of Shaw Pittman Potts & Trowbridge (included as part
of Exhibit 5)
23.2 Consent of Arthur Andersen LLP
24* Power of Attorney (included on signature page to the
Registration Statement)
27.1* Financial Data Schedule for 1997
27.2* Financial Data Schedule for 1996
27.3* Financial Data Schedule for 1995
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, as amended each filing of the registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the 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, the 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 Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE> 117
(3) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Arlington, State of Virginia, on this 22 day of
June, 1998.
TELEBANC FINANCIAL CORPORATION
By: /s/ MITCHELL H. CAPLAN
------------------------------------
MITCHELL H. CAPLAN
VICE CHAIRMAN, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<S> <C> <C>
/s/ DAVID A. SMILOW Chairman of the Board
- ------------------------------------------
DAVID A. SMILOW June 22, 1998
/s/ MITCHELL H. CAPLAN Vice Chairman of the Board, Chief
- ------------------------------------------ Executive Officer and President
MITCHELL H. CAPLAN (principal executive officer) June 22, 1998
/s/ AILEEN LOPEZ PUGH Executive Vice President and Chief
- ------------------------------------------ Financial Officer (principal
AILEEN LOPEZ PUGH financial and accounting officer) June 22, 1998
/s/ DAVID DECAMP Director
- ------------------------------------------
DAVID DECAMP June 22, 1998
/s/ DEAN C. KEHLER Director
- ------------------------------------------
DEAN C. KEHLER June 22, 1998
/s/ STEVEN F. PIAKER Director
- ------------------------------------------
STEVEN F. PIAKER June 22, 1998
/s/ MARK ROLLINSON Director
- ------------------------------------------
MARK ROLLINSON June 22, 1998
/s/ ARLEN W. GELBARD Director
- ------------------------------------------
ARLEN W. GELBARD June 22, 1998
---------------
* By: /s/ AILEEN LOPEZ PUGH
------------------------------------
AILEEN LOPEZ PUGH
PURSUANT TO POWER OF ATTORNEY
</TABLE>
II-5
<PAGE> 119
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1 Form of Underwriting Agreement
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant
3.1(b) Certificate of Designations (incorporated by reference
herein to Exhibit 3 the Registrant's Current Report on Form
8-K, dated March 17, 1997)
3.2 Bylaws of the Registrant (incorporated by reference herein
to Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, dated March 31,
1997)
4.1 Specimen certificate evidencing shares of Common Stock of
the Registrant (incorporated by reference herein to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1,
dated March 25, 1994, File No. 33-76930)
4.2 Form of warrant for the purchase of shares of Common Stock,
issued in connection with the Unit Purchase Agreement, dated
February 19, 1997, among the Registrant and the Purchasers
identified therein (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
dated March 17, 1997)
4.3 Form of warrant for the purchase of shares of Common Stock,
issued in connection with the units of warrants and
subordinated debt sold in the Registrant's initial public
offering (incorporated by reference herein to Exhibit 4.5 to
the Registrant's Registration Statement on Form S-1, dated
March 25, 1994, File No. 33-76930)
4.4 Declaration of Trust of TeleBanc Capital Trust II, dated May
22, 1998
4.5 Form of Certificate of Exchange Junior Subordinated
Debentures (incorporated by reference herein to Exhibit 4.3
to the Registrant's Form 10-K/A for the year ended December
31, 1997, dated April 2, 1998)
4.6 Amended and Restated Declaration of Trust of TeleBanc
Capital Trust I, dated June 9, 1997 (incorporated by
reference herein to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.7 Certificate of Trust of TeleBanc Capital Trust II, dated May
22, 1998
4.8 Form of Exchange Capital Security Certificate (incorporated
by reference herein to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.9 Exchange Guarantee Agreement by the Registrant for the
benefit of the holders of Exchange Capital Securities
(incorporated herein by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form S-4, dated
December 8, 1997, File No. 333-40399)
5 Form of opinion of Shaw Pittman Potts & Trowbridge as to the
legality of the securities being registered
10.1 1994 Stock Option Plan (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.2 1997 Stock Option Plan (incorporated by reference herein to
Exhibit D to the Registrant's definitive proxy materials
which were filed as Exhibit 99.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996,
dated March 31, 1997)
10.3 1998 Stock Incentive Plan
10.4 Employee Stock Ownership Plan of the Registrant
10.5* Agreement and Plan of Merger by and between the Registrant
and Direct Financial Corporation, dated January 4, 1998
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
10.6 Registration Rights Agreement, dated June 5, 1997, among the
Registrant, TeleBanc Capital Trust I and the Initial
Purchaser (incorporated by reference herein to Exhibit 4.8
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399)
10.7 Unit Purchase Agreement, dated February 19, 1997, among the
Registrant and the Purchasers identified therein
(incorporated by reference herein to Exhibit 10.1 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.8 Amended and Restated Acquisition Agreement, dated February
19, 1997, among the Registrant, Arbor Capital Partners,
Inc., MET Holdings, Inc., and William M. Daugherty
(incorporated by reference herein to Exhibit 10.2 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.9 Liquidated Damages Agreement, dated June 9, 1997, by and
among the Registrant, TeleBanc Capital Trust I, and the
Initial Purchaser (incorporated by reference herein to
Exhibit 4.9 to the Registrant's Registration Statement on
Form S-4, dated December 8, 1997, File No. 333-40399)
10.10 Tax Allocation Agreement, dated April 7, 1994, between
TeleBank and Registrant (incorporated by reference herein to
Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, dated May 3, 1994, File
No. 33-76930)
10.11 Indenture dated June 9, 1997, between the Registrant and
Wilmington Trust Company, as debenture trustee (incorporated
by reference herein to the Registrant's Registration
Statement on Form S-4, dated December 8, 1997, File No.
333-40399)
10.12 Form of Indenture between the Registrant and Wilmington
Trust Company as Trustee (incorporated by reference herein
to Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.13 Conversion Agreement, dated May 15, 1998, by and among the
Registrant and certain investors named therein
11* Statement regarding calculation of net income per share
21 Subsidiaries of the Registrant
23.1 Consent of Shaw Pittman Potts & Trowbridge (included as part
of Exhibit 5)
23.2 Consent of Arthur Andersen LLP
24* Power of Attorney (included on signature page to the
Registration Statement)
27.1* Financial Data Schedule for 1997
27.2* Financial Data Schedule for 1996
27.3* Financial Data Schedule for 1995
</TABLE>
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* Previously filed.
<PAGE> 1
EXHIBIT 1.1
4,100,000 SHARES(1)
TELEBANC FINANCIAL CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
July ____, 1998
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER CORP.
LEGG MASON WOOD WALKER, INCORPORATED
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
TELEBANC FINANCIAL CORPORATION, a Delaware corporation (the "Company"),
addresses you as the Representatives of each of the persons, firms and
corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirm its agreement with the several Underwriters
as follows:
1. Description of Shares. The Company proposes to issue and sell
4,100,000 shares of its authorized and unissued Common Stock, par value $0.01
per share, to the several Underwriters. The 4,100,000 shares of Common Stock,
par value $0.01 per share, to be sold by the Company are hereinafter called the
"Firm Shares." The Company also proposes to grant to the Underwriters an option
to purchase up to 615,000 additional shares of the Company's Common Stock, par
value $0.01 per share (the "Option Shares"), as provided in Section 7 hereof. As
used in this Agreement, the term "Shares" shall include the Firm Shares and the
Option Shares. All Common Stock, par value $0.01 per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby, including the
Shares, is hereinafter referred to as "Common Stock."
- --------
(1) Plus an option to purchase up to 615,000 additional shares from the Company
to cover over-allotments, if any.
-1-
<PAGE> 2
2. Representations, Warranties and Agreements of the Company.
I. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-2 (File No. 333-52871)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses"), including all documents
incorporated by reference therein, and of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement)
-2-
<PAGE> 3
such registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company omitted
information from the Registration Statement pursuant to Rule 430A(a) of the
Rules and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the Rules
and Regulations); provided, however, that if in reliance on Rule 434 of the
Rules and Regulations and with the consent of BancAmerica Robertson Stephens, on
behalf of the several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior
to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to
completion" (as defined in Rule 434(g) of the Rules and Regulations) last
provided to the Underwriters by the Company and circulated by the Underwriters
to all prospective purchasers of the Shares (including the information deemed to
be a part of the Registration Statement at the time it became effective pursuant
to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if
any revised prospectus shall be provided to the Underwriters by the Company for
use in connection with the offering of the Shares that differs from the
prospectus referred to in the immediately preceding sentence (whether or not
such revised prospectus is required to be filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to
such revised prospectus from and after the time it is first provided to the
Underwriters for such use. If in reliance on Rule 434 of the Rules and
Regulations and with the consent of BancAmerica Robertson Stephens, on behalf of
the several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that
a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
Prospectus and the term sheet, together, will not be materially different from
the prospectus in the Registration Statement.
(b) To the Company's knowledge, the Commission has not issued
any order preventing or suspending the use of any Preliminary Prospectus or
instituted proceedings for that purpose. Each such Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act and
the Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, (ii) the Registration
Statement, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and (iii) the Prospectus, and any amendments or supplements thereto,
did not and will not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light
-3-
<PAGE> 4
of the circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties contained in this
subparagraph (b) shall apply to information contained in or omitted from the
Registration Statement or Prospectus, or any amendment or supplement thereto, in
reliance upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by any Underwriter specifically for use in
the preparation thereof.
(c) (i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation with full corporate power and authority to own, lease and
operate its properties and conduct its business as described in the Prospectus;
the Company is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its Subsidiaries
(as defined below) considered as one enterprise (a "Material Adverse Effect");
to the Company's knowledge no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; the Company is in possession
of and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect; the Company is not in violation of its
charter or bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by which it or
its respective properties may be bound; and the Company is not in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or over its respective properties
of which it has knowledge. The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than TeleBank,
a federally chartered savings bank ("TeleBank"), TeleBanc Capital Trust I,
TeleBanc Capital Trust II, TeleBanc Capital Markets, Inc., TeleBanc Insurance
Services, Inc., TeleBanc Servicing Corporation, AGT Mortgage Services, LLC, and
AGT PRA LLC (the entities referred to in this Section 2.I.(c)(i) may each be
referred to hereinafter individually as, a "Subsidiary," and collectively as,
"Subsidiaries");
(ii) The Company is a registered savings and loan
holding company under the Home Owners' Loan Act ("HOLA") and has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware, with corporate power and authority to (1) own,
lease and operate its properties, (2) conduct its businesses as currently
conducted, and as described in the Prospectus, and (3) enter into and perform
its obligations under this Agreement. The Company has been duly qualified as a
foreign
-4-
<PAGE> 5
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which the Company owns or leases its
properties or conducts any business so as to require such qualification, except
where the failure so to qualify or to be in good standing could not reasonably
be expected to result in a Material Adverse Effect;
(iii) Each Subsidiary has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority to
own, lease and operate its properties and conduct its business as described in
the Prospectus (or, if not so described, as currently conducted), and is duly
qualified as a foreign corporation to transact business and is in good standing
in all places where such qualification or good standing is necessary or to the
extent not so qualified or not in good standing, where the failure to obtain
such qualification or to be in good standing could not reasonably be expected to
have a Material Adverse Effect; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; the activities of the
Subsidiaries of TeleBank, a federally chartered and insured stock savings bank,
are permitted to subsidiaries of a federally chartered savings bank under
applicable law and the rules and regulations of the Office of Thrift Supervision
set forth in Chapter V of Title 12 of the Code of Federal Regulations; all of
the issued and outstanding capital stock of each Subsidiary that is a
corporation has been duly authorized and validly issued and is fully paid and
nonassessable and is owned, directly or through other Subsidiaries, by the
Company; and all of the capital stock, or membership interests, as the case may
be, of each Subsidiary that is owned by the Company, directly or through other
Subsidiaries, is owned free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest (collectively, "Liens");
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any Subsidiary
is a party or by which the Company or any Subsidiary or their respective
properties may be bound, (ii) the charter, including certificates of
designations, or bylaws of the Company, or (iii) any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any Subsidiary or over its respective properties. No consent,
approval, authorization or order of or qualification with any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any Subsidiary or
-5-
<PAGE> 6
over its respective properties is required for the execution and delivery of
this Agreement and the consummation by the Company of the transactions herein
contemplated, except such as may be required under the Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or under state or other
securities or Blue Sky laws, all of which requirements have been satisfied in
all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company or
any Subsidiary, or any of their respective officers or properties, assets or
rights before any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any Subsidiary or over their
respective officers or properties or otherwise which (i) would or would be
reasonably likely to result in a Material Adverse Effect, (ii) would or would be
reasonably likely to prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement or the
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company or any Subsidiary of a character required to
be described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement by the Act or the Rules and
Regulations which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding capital stock of the Company has been duly
authorized and validly issued and is fully paid and nonassessable, has been
issued in compliance with all federal and state securities laws, was not issued
in violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the Company's authorized and outstanding capital
stock is as set forth in the Prospectus under the caption "Capitalization" and
conforms in all material respects to the statements relating thereto contained
in the Registration Statement and the Prospectus (and such statements correctly
state the substance of the instruments defining the capitalization of the
Company); the Firm Shares and the Option Shares have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any Liens and no preemptive
right, co-sale right, registration right, right of first refusal or other
similar right of stockholders exists with respect to any of the Firm Shares or
Option Shares or the issuance and sale thereof other than those that have been
expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated hereunder on the Closing Date. No further approval or authorization
of any stockholder, the Company's Board of Directors or others is required for
the issuance and sale or transfer of the Shares except as may be required under
the Act, the Exchange Act or under state or other securities or Blue Sky laws.
Except as disclosed in the Prospectus and the Company's financial statements,
and the related notes thereto, included in the Prospectus, the Company does not
have outstanding any options or warrants to purchase, or any preemptive rights
or other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, its capital
stock
-6-
<PAGE> 7
or any such options, warrants, rights, convertible securities or obligations.
The description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus fairly presents in all material respects
the information required to be shown with respect to such plans, arrangements,
options and rights.
(g) (i) The Company is a party to an Agreement and Plan of
Merger dated as of January 14, 1998 with Direct Financial Corporation, a New
Jersey corporation ("Direct"), which provides for, among other things, the
Company's acquisition of Direct through (a) the merger of Direct into the
Company, with the Company being the surviving corporation, and (b) immediately
upon consummation of such merger, the merger of Direct's wholly owned subsidiary
Premium Bank, a federally chartered savings bank ("Premium"), with and into
TeleBank, with TeleBank being the surviving bank (the "Merger Agreement").
(ii) The Merger Agreement is in full force and effect,
and neither the Company nor Direct is in breach of any representation, warranty,
covenant, agreement, obligation or condition therein or in any agreement or
other document ancillary thereto, and no waiver has been granted in respect of
any of such above-mentioned representations, warranties, covenants, agreements,
obligations and conditions;
(iii) The only conditions precedent to the obligations
of the Company or Direct to effect the merger of Direct into the Company and of
Premium into TeleBanc under the Merger Agreement that remain subject to
satisfaction are [____________ and _______________], and none of such conditions
set forth in Article V have been waived by either the Company or Direct, and
currently the Company has no expectation or reasonable basis to expect that any
such waiver will be necessary to effect such mergers.
(h) Arthur Anderson LLP, which has examined the consolidated
financial statements of the Company and of Direct, together with the related
schedules and notes, as of December 31, 1996 and 1997 and for each of the three
years ended December 31, 1997 and the supplemental financial statements of the
Company and of Direct, together with the related schedules and notes, as of
December 31, 1996 and 1997 and each of the three years ended December 31, 1997,
which have been delivered to the Underwriters, and in the case of such statement
relating to the Company which have been filed with the Commission as a part of
the Registration Statement, and which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations; the audited consolidated financial statements of the Company and of
Direct, together with the related schedules and notes, and the unaudited
consolidated financial information, delivered to the Underwriters, and in the
case of the audited and unaudited financial statements and related schedules and
notes relating to the Company forming part of the Registration Statement, and
the Prospectus, fairly present in all material respects the financial position
and the results of operations of the Company and of Direct at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the
-7-
<PAGE> 8
unaudited consolidated financial information, filed with the Commission as part
of the Registration Statement, have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved except as may be otherwise stated therein. The selected and summary
financial and statistical data included in the Registration Statement present
fairly in all material respects the information shown therein and have been
compiled on a basis consistent with the audited financial statements presented
therein. No other financial statements or schedules are required to be included
in the Registration Statement pursuant to the Act and the Rules and Regulations.
(i) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has not been
(i) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company or Direct,
(ii) any transaction that is material to the Company or Direct except
transactions entered into in the ordinary course of business, (iii) any
obligation, direct or contingent, that is material to the Company or Direct
incurred by the Company or Direct except obligations incurred in the ordinary
course of business, (iv) any change in the capital stock or outstanding
indebtedness of the Company or Direct that is material to the Company or Direct,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company, or, (vi) any loss or damage (whether or not
insured) to the property of the Company which has had or is reasonably likely to
have a Material Adverse Effect.
(j) Except as set forth in the Registration Statement and the
Prospectus (i) the Company and each of the Subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
the Prospectus as owned by it, free and clear of any Lien other than such as
would not have a Material Adverse Effect, (ii) the agreements to which the
Company, or a Subsidiary, is a party described in the Registration Statement and
the Prospectus are valid agreements, enforceable by the Company, or a
Subsidiary, as the case may be, except as the enforcement thereof may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by general
equitable principles and, to the best of the Company's knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements, and (iii) the Company and the Subsidiaries
have valid and enforceable leases for all properties described in the
Registration Statement and the Prospectus as leased by them, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and the Prospectus, the Company and the
Subsidiaries own or lease all such properties as are necessary to their
operations as currently conducted or as proposed to be conducted.
(k) The Company and the Subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes shown thereon as due, except where the failure to file or failure
to pay would not have a Material Adverse Effect, and there is no tax deficiency
that has been or, to the best of the Company's knowledge, is
-8-
<PAGE> 9
reasonably likely to be asserted against the Company or any Subsidiary that
would have or would be reasonably likely to have a Material Adverse Effect, and
all known tax liabilities are adequately provided for on the Company's books.
(l) The Company and each Subsidiary maintains insurance with
insurers of recognized financial responsibility of the types and in the amounts
generally deemed adequate for its business and consistent with insurance
coverage maintained by similar companies in similar businesses, including
insurance covering real and personal property owned or leased by the Company or
a Subsidiary against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect; neither the Company nor any Subsidiary has been refused any insurance
coverage sought or applied for; and the Company has no reason to believe that it
and the Subsidiaries will not be able to renew their existing insurance coverage
as and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue their businesses at a cost that would
not have a Material Adverse Effect.
(m) To the best of Company's knowledge, no labor disturbance
by the employees of the Company or any Subsidiary exists or is imminent; and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of principal suppliers of the Company or any Subsidiary, that
might be expected to result in a Material Adverse Effect. No collective
bargaining agreement exists with any of the employees of the Company or any
Subsidiary and, to the best of the Company's knowledge, no such agreement is
imminent.
(n) The Company and each Subsidiary owns or possesses adequate
rights to use all patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct their businesses as described in the Registration Statement and the
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a Material
Adverse Effect; and, except as described in the Prospectus, neither the Company
nor any Subsidiary has received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect.
(o) The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act, and upon completion of the public offering of the Firm
Shares and the Option Shares, as the case may be, will be listed on the Nasdaq
National Market, and the Company has taken no action designed to, or likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act or which would prevent the Common Stock from becoming listed, or
cause a delisting of the Common Stock from the Nasdaq National Market, and has
Company has not received any notification that the Commission or the National
Association of Securities Dealers, Inc. ("NASD") is contemplating terminating
such registration or authorization to list.
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<PAGE> 10
(p) The Company is familiar with the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and
has in the past conducted, and intends in the future to conduct, its affairs in
such a manner as to ensure that it will not become an "investment company" or a
company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(q) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act and the
Rules and Regulations.
(r) To the Company's knowledge, neither the Company nor any
Subsidiary has at any time since inception (i) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(t) Each director and executive officer of the Company has
agreed in writing that such person will not, for a period ending 180 days from
the date of the Prospectus (the "Lock-up Period"), offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to (collectively, a "Disposition") any Common Stock, any options or
warrants to purchase any Common Stock or any securities convertible into or
exchangeable for Common Stock (collectively, "Securities") now owned or
hereafter acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, (ii) as a distribution to partners or stockholders of
such person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, or (iii) with the prior written consent of
BancAmerica Robertson Stephens. The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including
any put or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Furthermore, such person has also agreed and
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<PAGE> 11
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder. The Company
has provided to counsel for the Underwriters true, accurate and complete copies
of all of the agreements pursuant to which its directors, officers, and
stockholders have agreed to such or similar restrictions (the "Lock-up
Agreements") currently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its directors, officers
or other stockholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of BancAmerica Robertson
Stephens.
(u) Except as set forth in the Registration Statement and
Prospectus, (i) the Company and each Subsidiary is in compliance, in all
material respects, with all rules, laws and regulations relating to the use,
treatment, storage and disposal of toxic substances and protection of health or
the environment ("Environmental Laws") which are applicable to its business,
(ii) neither the Company nor any Subsidiary has received notice from any
governmental authority or third party of an asserted claim under Environmental
Laws, which claim is required to be disclosed in the Registration Statement and
the Prospectus, (iii) to the Company's knowledge, neither the Company nor any
Subsidiary will be required to make future material capital expenditures to
comply with Environmental Laws and (iv) to the Company's knowledge, no property
which is leased or occupied by the Company or any Subsidiary has been designated
as a Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or
otherwise designated as a contaminated site under applicable state or local law.
(v) The Company and the Subsidiaries maintain systems of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company or any Subsidiary to or for the benefit of any of
the director or executive officer of the Company or any Subsidiary or any of the
members of the families of any of them, except as disclosed in the Registration
Statement and the Prospectus.
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<PAGE> 12
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein contained, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $[ ] per share, that number of
Firm Shares which is set forth opposite such Underwriter's name in Schedule A
hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by wire
transfer of Federal funds to the account specified by the Company, at the
offices of Arent, Fox, Kintner, Plotkin & Kahn, PLLC, 1050 Connecticut Avenue,
N.W., Washington, DC 20036-5339 (or at such other place as may be agreed upon
among the Representatives and the Company, at 7:00 A.M., San Francisco time (a)
on the third full business day following the first day that Shares are traded,
(b) if this Agreement is executed and delivered after 1:30 P.M., San Francisco
time, the fourth full business day following the day that this Agreement is
executed and delivered or (c) at such other time and date not later than seven
full business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 10 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two full business days following delivery of
copies of the Prospectus to the Representatives. The certificates for the Firm
Shares to be so delivered will be made available to you at such office or such
other location including in New York City, as you may reasonably request for
checking at least one full business day prior to the Closing Date and will be in
such names and denominations as you may request, such request to be made at
least two full business days prior to the Closing Date. If the Representatives
so elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 11 hereof) of the Firm Shares at a public offering price of $[ ] per
share. After such public offering, the several Underwriters may, in their
discretion, vary the public offering price.
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<PAGE> 13
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters, and
under the section captioned "Underwriting" in any Preliminary Prospectus and in
the Prospectus constitutes the only information furnished by the Underwriters to
the Company for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement, and you, on behalf of the respective Underwriters,
represent and warrant to the Company that the statements made therein do not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
The Company hereby confirms its engagement of BancAmerica Robertson
Stephens as, and BancAmerica Robertson Stephens hereby confirms its agreement
with the Company to render services as, a "qualified independent underwriter,"
within the meaning of Section (b)(15) of Rule 2720 of the Conduct Rules of the
NASD with respect to the offering and sale of the Shares. BancAmerica Robertson
Stephens solely in its capacity as qualified independent underwriter and not
otherwise, is referred to herein as the "QIU." The price at which the shares
will be sold to the public shall not be higher than the maximum price
recommended by BancAmerica Robertson Stephens acting as QIU.
4. Further Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, the Company will provide evidence satisfactory to
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<PAGE> 14
you that the Prospectus contains such information and has been filed with the
Commission within the time period prescribed; the Company will notify you
promptly of any request by the Commission for the amending or supplementing of
the Registration Statement or the Prospectus or for additional information;
promptly upon your request, the Company will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; the Company will promptly
prepare and file with the Commission, and promptly notify you of the filing of,
any amendments or supplements to the Registration Statement or Prospectus which
may be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, the Company will prepare
promptly upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and the Company will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations, the Exchange Act and the rules and
regulations of the Commission thereunder and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than
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<PAGE> 15
the first full business day following the first day that Shares are traded,
copies of the Registration Statement (three of which will be signed and which
will include all exhibits), each Preliminary Prospectus, the Prospectus and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a)(3) of the Act, all in such quantities as
you may from time to time reasonably request. Notwithstanding the foregoing, if
BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall
agree to the utilization of Rule 434 of the Rules and Regulations, the Company
shall provide to you copies of a Preliminary Prospectus updated in all respects
through the date specified by you in such quantities as you may from time to
time reasonably request.
(e) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the forty-fifth day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve-month
period beginning after the effective date of the Registration Statement.
(f) During a period of five years after the date hereof, as long as
the Company is subject to the information requirements of the Exchange Act, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its stockholders, statements of
operations of the Company for each of the first three quarters in the form
furnished to the Company's stockholders, (ii) concurrently with furnishing to
its stockholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of stockholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to stockholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASD, (v) every material press release and every material news
item or article in respect of the Company or its affairs which was generally
released to stockholders or prepared by the Company or any of its subsidiaries,
and (vi) any additional information of a public nature concerning the Company or
its Subsidiaries, or its business which you may reasonably request. During such
above-mentioned five-year period, if the Company shall have active
Subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and its Subsidiaries are
consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary (as defined in Rule 1-02 of Regulation S-X of the
Commission) which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
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<PAGE> 16
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement to be performed hereunder or to fulfill any condition of
the Underwriters' obligations hereunder, or if the Company shall terminate this
Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall
terminate this Agreement pursuant to Section 11(b)(i), the Company will
reimburse the several Underwriters for all out-of-pocket expenses (including
reasonable fees and disbursements of Underwriters' counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the Shares.
(j) If at any time during the ninety-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is reasonably likely to
be materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to the Company and you, responding to or commenting on such rumor, publication
or event.
(k) During the Lock-up Period, the Company will not, without the
prior written consent of BancAmerica Robertson Stephens, effect the Disposition
of, directly or indirectly, any Securities other than the sale of the Firm
Shares and the Option Shares hereunder, the Company's issuance of options or
Common Stock under the Company's currently authorized 1997 Stock Option Plan,
1994 Stock Option Plan, Employee Stock Ownership Plan and 1998 Stock Incentive
Plan (collectively, the "Equity Plans"), the Company's issuance of Common Stock
pursuant to exercise of the 1997 Warrants, 1994 Warrants and Contingent Warrants
(each as defined in the Registration Statement and Prospectus), and the
Company's issuance of the TCT II Junior Subordinated Debentures (as defined in
the Registration Statement and Prospectus).
(l) During a period of one hundred eighty days from the effective
date of the Registration Statement, the Company will not file a registration
statement registering capital stock of the Company under the Equity Plans or
other employee benefit plan.
5. Expenses.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial
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<PAGE> 17
statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus
and any amendments or supplements thereto; the printing of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary
Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and Power of Attorney, and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any, the cost of all certificates
representing the Shares and transfer agents' and registrars' fees; the fees and
disbursements of counsel for the Company; all fees and other charges of the
Company's independent certified public accountants; the cost of furnishing to
the several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus, and any
amendments or supplements to any of the foregoing; NASD filing fees and the cost
of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and reasonable fees and disbursements of
Underwriters' counsel in connection with such NASD filings and Blue Sky
qualifications); and all other expenses directly incurred by the Company in
connection with the performance of its obligations hereunder.
(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty largest banks (the
"Prime Rate"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters
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<PAGE> 18
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
within thirty days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 5(a)(ii) and
5(b) hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. If the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 8(d) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
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<PAGE> 19
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus; and
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company dated the Closing Date or such
later date on which Option Shares are to be purchased addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:
(i) The Company and each Subsidiary have each been duly
incorporated and are each validly existing as a corporation in good
standing under the laws of the jurisdiction of their respective
incorporation;
(ii) The Company and each Subsidiary each have the corporate
power and authority to own, lease and operate their respective
properties and to conduct their respective businesses as described in
the Prospectus;
(iii) The Company and each Subsidiary are each duly qualified
to do business as a foreign corporation and are good standing in each
jurisdiction, if any, in which the ownership or leasing of their
respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so
qualified or be in good standing would not have a Material Adverse
Effect. To such counsel's knowledge, neither the Company nor any
Subsidiary owns or controls, directly or indirectly, any corporation,
association or other entity except the Subsidiaries;
(iv) The Company's authorized, issued and outstanding capital
stock is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; the Company's issued
and outstanding capital stock has been duly and validly issued and is
fully paid and nonassessable; and, to such counsel's knowledge, will
not have been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or
other similar right;
(v) All issued and outstanding capital stock of each
Subsidiary has been duly authorized and validly issued and is fully
paid and nonassessable, and, to such counsel's knowledge, has not been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right and are owned by the Company free and clear of any Liens;
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<PAGE> 20
(vi) The Firm Shares or the Option Shares, as the case may be,
to be issued by the Company pursuant to the terms of this Agreement
have been duly authorized and, upon issuance and delivery against
payment therefor in accordance with the terms hereof, will be duly and
validly issued and fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first
refusal or other similar right.
(vii) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by the Company hereunder;
(viii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution
and delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and except
as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(ix) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(x) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom
as to which such counsel need express no opinion), as of the effective
date of the Registration Statement, complied as to form in all material
respects with the requirements of the Act and the applicable Rules and
Regulations;
(xi) The information in the Prospectus under the captions
"Business -- Government Regulation" and "Description of Securities,"
to the extent that it constitutes matters of law or legal conclusions,
has been reviewed by such counsel and is a fair summary of such matters
and conclusions; and the form of certificate evidencing the Common
Stock and filed as an exhibit to the Registration Statement complies
with Delaware law;
(xii) The description in the Registration Statement and the
Prospectus of the Company's charter, including certificates of
designations, and bylaws is accurate and fairly presents the
information required to be presented by the Act and the applicable
Rules and Regulations and the description in the Registration Statement
and the Prospectus of statutes fairly presents in all material respects
the information required to be presented by the Act and the applicable
Rules and Regulations;
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<PAGE> 21
(xiii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company or any Subsidiary
is a party of a character required to be described or referred to in
the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement pursuant to the Act or the Rules
and Regulations which are not described or referred to therein or filed
as required;
(xiv) The performance of this Agreement and the consummation
of the transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the
Company's charter, including certificates of designations, or bylaws or
(b) to such counsel's knowledge, result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any
bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which
the Company or any Subsidiary is a party or by which its respective
properties are bound, or any applicable statute, rule or regulation
known to such counsel or, to such counsel's knowledge, any order, writ
or decree of any court, government or governmental agency or body
having jurisdiction over the Company or any Subsidiary, or over any of
its properties or operations where such breach or violation would have
or be reasonably likely to have a Material Adverse Effect;
(xv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body
having jurisdiction over the Company or its Subsidiaries, or over any
of their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except such as have been obtained under the Act or such as may be
required under state or other securities or Blue Sky laws in connection
with the purchase and the distribution of the Shares by the
Underwriters (as to which such counsel need express an opinion);
(xvi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or
any Subsidiary of a character required to be disclosed in the
Registration Statement or the Prospectus by the Act or the Rules and
Regulations, other than those described therein;
(xvii) To such counsel's knowledge, neither the Company nor
any Subsidiary is currently (a) in violation of its respective
charter, including certificates of designations, or bylaws, or (b) in
breach of any applicable statute, rule or regulation known to such
counsel or, to such counsel's knowledge, any order, writ or decree of
any court or governmental agency or body having jurisdiction over the
Company, or over any of its respective properties or operations,
except where such breach or violation would not have or not be
reasonably likely to have a Material Adverse Effect; and
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<PAGE> 22
(xviii) To such counsel's knowledge, except as set forth in
the Registration Statement and the Prospectus, no holders of Common
Stock or other securities of the Company have registration rights with
respect to securities of the Company and, except as set forth in the
Registration Statement and the Prospectus, all holders of securities of
the Company having rights known to such counsel to registration of such
shares of Common Stock or other securities, because of the filing of
the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement or have included
securities in the Registration Statement pursuant to the exercise of
and in full satisfaction of such rights.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
fact upon representations or certificates of officers of the Company, and of
government officials. Copies of any opinion, representation or certificate so
relied upon shall be delivered to you, as Representatives of the Underwriters,
and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Arent, Fox, Kintner, Plotkin & Kahn, PLLC, in form and substance satisfactory
to you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
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(f) You shall have received on the Closing Date and on any later date on which
Option Shares are to be purchased, as the case may be, a letter from Arthur
Andersen LLP addressed to the Underwriters, dated the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, confirming
that they are independent public accountants with respect to the Company within
the meaning of the Act and the applicable published Rules and Regulations and
based upon the procedures described in such letter delivered to you concurrently
with the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than five business days prior to the Closing Date
or such later date on which Option Shares are to be purchased, as the case may
be, (i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from Arthur
Andersen LLP shall be addressed to or for the use of the Underwriters in form
and substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations, (ii) set forth their opinion with respect to their examination
of the financial condition of the Company as of December 31, 1997 and related
statements of operations, stockholders' equity, and cash flows for the twelve
months ended December 31, 1997, (iii) state that Arthur Andersen LLP has
performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS
71") for a review of interim financial information and providing the report of
Arthur Andersen as described in SAS 71 on the financial statements of the
Company for the quarter ended March 31, 1998 (the "Quarterly Financial
Statements"), (iv) state that in the course of such review, nothing came to
their attention that leads them to believe that any material modifications need
to be made to any of the Quarterly Financial Statements in order for them to be
in compliance with generally accepted accounting principles consistently applied
across the periods presented, and (v) address other matters agreed upon by
Arthur Andersen LLP and you. In addition, you shall have received from Arthur
Andersen LLP a letter addressed to the Company and made available to you for the
use of the Underwriters stating that their review of the Company's respective
systems of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of December 31, 1997 and for the year then ended, did not disclose
any weaknesses in internal controls that they considered to be material
weaknesses.
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<PAGE> 24
(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects, as if made on
and as of the Closing Date or any later date on which Option Shares are
to be purchased, as the case may be, and the Company has complied in
all material respects with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be;
(ii) To the best of their knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate,
the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations and in all
material respects conformed to the requirements of the Act and the
Rules and Regulations, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto,
did not and does not include any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company, (b) any transaction that is material to the
Company, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that is material to
the Company, incurred by the Company or any Subsidiary, except
obligations incurred in the ordinary course of business, (d) any change
in the capital stock or outstanding indebtedness of the Company that is
material to the Company, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company, or (f) any
loss or damage (whether or not insured) to the property of the Company
or any Subsidiary which has been sustained or will have been
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<PAGE> 25
sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company.
(h) The Company shall have obtained and delivered to you the Lock-up
Agreements.
(i) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company) as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein contained, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of 615,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
3 hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one or more occasions in whole or in part during the
period of thirty days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The number of
Option Shares to be purchased by each Underwriter upon the exercise of such
option shall be the same proportion of the total number of Option Shares to be
purchased by the several Underwriters pursuant to the exercise of such option as
the number of Firm Shares purchased by such Underwriter (set forth in Schedule A
hereto) bears to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the Representatives
in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by wire transfer of Federal funds to the
account specified by the Company. Such delivery and payment shall take place at
the offices of Arent, Fox, Kintner, Plotkin & Kahn, PLLC, 1050 Connecticut
Avenue, N.W., Washington, DC 20036-5339 or at such other place as may be agreed
upon among the Representatives and the Company (i) on the Closing Date, if
written notice of the exercise of such option is received by the Company at
least two full business days prior to the Closing Date, or
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<PAGE> 26
(ii) on a date which shall not be later than the third full business day
following the date the Company receives written notice of the exercise of such
option, if such notice is received by the Company less than two full business
days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including in New
York City, as you may reasonably request for checking at least one full business
day prior to the date of payment and delivery and will be in such names and
denominations as you may request, such request to be made at least two full
business days prior to such date of payment and delivery. If the Representatives
so elect, delivery of the Option Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 6 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been furnished
with all such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company or the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including in its capacity
as an Underwriter or as a "qualified independent underwriter" within the meaning
of Section (b)(15) of Rule 2720 of the Conduct Rules of the NASD) under the Act,
the Exchange Act or otherwise, specifically including losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration
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<PAGE> 27
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act or otherwise, specifically including losses, claims, damages or liabilities
(or actions in respect thereof) arising out of or based upon (i) any breach of
any representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not
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<PAGE> 28
misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(c) to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company and each person, if any, who controls the Company within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition to
any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a), 8(b) and 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable
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<PAGE> 29
in respect of any amounts paid in settlement of any action unless the
indemnifying party shall have approved the terms of such settlement; provided
that such consent shall not be unreasonably withheld. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or has been threatened to be named a party and
indemnification has been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(d) To provide for just and equitable contribution in any action in
which a claim for indemnification is made pursuant to this Section 8 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 8 provides for indemnification in
such case, all the parties hereto shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Underwriters severally and not
jointly are responsible pro rata for the portion represented by the percentage
that, except as set forth in Section 8(g) hereby, the underwriting discount
bears to the initial public offering price hereunder, and the Company are
responsible for the remaining portion, provided, however, that (i) no
Underwriter shall be required to contribute any amount in excess of the amount
by which the underwriting discount applicable to the Shares purchased by such
Underwriter exceeds the amount of damages which such Underwriter has otherwise
required to pay and (ii) no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(e) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter or the Company within the meaning
of the Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its Subsidiaries and their respective businesses to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Act and the Exchange Act.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company or any or any of its officers, directors or controlling
persons within the meaning of the Act or the
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<PAGE> 30
Exchange Act, and shall survive the delivery of the Shares to the several
Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four hours to allow the several Underwriters the privilege of
substituting within twenty-four hours (including non-business hours) another
underwriter or underwriters (which may include any nondefaulting Underwriter)
satisfactory to the Company. If no such underwriter or underwriters shall have
been substituted as aforesaid by such postponed Closing Date, the Closing Date
may, at the option of the Company, be postponed for a further twenty-four hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven full
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement, supplements to the Prospectus or other such documents
which may thereby be made necessary, and (ii) the respective number of Firm
Shares to be purchased by the remaining Underwriters and substituted underwriter
or underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
If this Agreement is terminated pursuant to the preceding paragraph
of this Section 10, the Company shall not be liable to any Underwriter (except
as provided in Sections
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<PAGE> 31
5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company and the other
Underwriters for damages, if any, resulting from such default) be liable to the
Company (except to the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., San Francisco time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the initial public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
shall have failed, refused or been unable to perform any agreement on its part
to be performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled, including any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse, or (ii) if
additional material governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been suspended
on either such exchange or in the over the counter market by the NASD, or if a
banking moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall
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<PAGE> 32
have been an outbreak or escalation of hostilities or of any other insurrection
or armed conflict or the declaration by the United States of a national
emergency which, in the reasonable opinion of the Representatives, makes it
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. In the event of termination pursuant to
subparagraph (i) above, the Company shall remain obligated to pay costs and
expenses pursuant to Sections 4(i), 5 and 8 hereof. Any termination pursuant to
any of subparagraphs (ii) through (v) above shall be without liability of any
party to any other party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, Suite 2600, San Francisco, California 94104, telecopier number (415)
781-0278, Attention: General Counsel, with a copy to Arent, Fox, Kintner,
Plotkin & Kahn, PLLC, 1050 Connecticut Avenue, N.W., Washington, DC 20036-5339,
telecopier number (202) 857-6395, Attention: Carter Strong, Esq.; if sent to the
Company, such notice shall be mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to TELEBANC FINANCIAL
CORPORATION, at 1111 North Highland Street, Arlington, Virginia, Attention:
Aileen Lopez Pugh, with a copy to Shaw Pittman Potts & Trowbridge, 1501 Farm
Credit Drive, McLean, Virginia 22102, Attention: Ellen Canan Grady, Esq.
13. Parties. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or entity, other
than the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in Section 8 hereof,
any legal or equitable right, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or entity. No purchaser of any
of the Shares from any Underwriter shall be construed a successor or assign by
reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act on
behalf of each of the several Underwriters, and the Company shall be entitled to
act and rely upon any statement,
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<PAGE> 33
request, notice or agreement made or given by you jointly or by BancAmerica
Robertson Stephens on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the internal laws of the State of New York.
15. Counterparts. This Agreement may be signed in several
counterparts, each of which will constitute an original.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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<PAGE> 34
If the foregoing correctly sets forth the understanding among the Company
and the several Underwriters, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
the Company and the several Underwriters.
Very truly yours,
TELEBANC FINANCIAL CORPORATION,
a Delaware corporation
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
Accepted as of the date first above written:
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER CORP.
LEGG MASON WOOD WALKER, INCORPORATED
By BANCAMERICA ROBERTSON STEPHENS
By
-----------------------------------
Authorized Signatory
-34-
<PAGE> 35
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
- ------------ ---------
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER CORP.
LEGG MASON WOOD WALKER, INCORPORATED
<S> <C>
---------
Total............................................... 2,800,000
=========
</TABLE>
-1-
<PAGE> 1
EXHIBIT 3.1(a)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TELEBANC FINANCIAL CORPORATION
TeleBanc Financial Corporation, a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
FIRST: The name of the Corporation is TeleBanc Financial
Corporation. The original Certificate of Incorporation of the Corporation was
filed under the name "At Home Financial Corporation" with the Secretary of
State of the State of Delaware on January 27, 1994. An Amended and Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on March 23, 1994.
SECOND: This Amended and Restated Certificate of Incorporation
was duly adopted in accordance with Section 245 of the General Corporation Law
of the State of Delaware (the "Delaware General Corporation Law"), and restates
and integrates and further amends the provisions of the Amended and Restated
Certificate of Incorporation of the Corporation.
THIRD: The text of the Amended and Restated Certificate of
Incorporation of the Corporation hereby is amended and restated to read in its
entirety as follows:
1. NAME.
The name of the Corporation is TeleBanc Financial Corporation.
2. REGISTERED OFFICE AND AGENT.
The registered office of the Corporation shall be located at
1013 Centre Road, Wilmington, Delaware 19805 in the County of New Castle. The
registered agent of the Corporation at such address shall be Corporation
Service Company.
3. PURPOSE AND POWERS.
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law. The Corporation shall have all power necessary or helpful to
engage in such acts and activities.
4. CAPITAL STOCK.
4.1. AUTHORIZED SHARES.
The total number of shares of all classes of stock that the
Corporation shall have the authority to issue is Thirty Million (30,000,000)
shares, of which 500,000 shares shall be serial preferred stock, having a par
value of $0.01 per share ("Preferred Stock"), and Twenty-Nine Million Five
Hundred Thousand (29,500,000) shall be classified as shares of common stock,
having a par value of $0.01 per share ("Common Stock"). The Board of
<PAGE> 2
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").
4.2. COMMON STOCK.
(a) RELATIVE RIGHTS.
The Common Stock shall be subject to all of the rights,
privileges, preferences and priorities of the Preferred Stock as set forth in
the certificate of designations filed to establish the respective series of
Preferred Stock. Except as provided in Section 4.2(e) hereof, each share of
Common Stock shall have the same relative rights as and be identical in all
respects to all the other shares of Common Stock.
(b) VOTING RIGHTS.
Except as provided in Section 4.2(e) hereof, each holder of
shares of Common Stock shall be entitled to attend all special and annual
meetings of the stockholders of the Corporation and, share for share and
without regard to class, together with the holders of all other classes of
stock entitled to attend such meetings and to vote (except any class or series
of stock having special voting rights), to cast one vote for each outstanding
share of Common Stock so held upon any matter or thing (including, without
limitation, the election of one or more directors) properly considered and
acted upon by the stockholders, except as otherwise provided in this Amended
and Restated Certificate of Incorporation or by applicable law. There shall be
no cumulative voting rights in the election of directors.
(c) DIVIDENDS.
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of the outstanding shares of any class of stock
having preference over the Common Stock as to the payment of dividends, the
full amount of dividends and of sinking fund or retirement fund or other
retirement payments, if any, to which such holders are respectively entitled in
preference to the Common Stock, then the holders of record of the Common Stock
and any class or series of stock entitled to participate therewith as to
dividends, shall be entitled to receive dividends, when, as, and if declared by
the Board of Directors, out of any assets legally available for the payment of
dividends thereon.
(d) DISSOLUTION, LIQUIDATION, WINDING UP.
In the event of any dissolution, liquidation or winding up of
the Corporation, whether voluntary or involuntary, the holders of record of the
Common Stock then outstanding, and all holders of the outstanding shares of any
class or series of stock entitled to participate therewith in whole or in part,
as to distribution of assets, shall become entitled to participate in the
distribution of any assets of the Corporation available for distribution, in
cash or in kind, remaining after the Corporation shall have paid, or set aside
for payment, to the holders of outstanding shares of any class of stock having
preference over the Common Stock in the event of dissolution, liquidation or
winding up, the full preferential amounts (if any) to which they are entitled,
and shall have paid or provided for payment of all debts and liabilities of the
Corporation.
(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.
2
<PAGE> 3
(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 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.
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
3
<PAGE> 4
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 the holder or holders of record
of the shares of voting Common Stock represented thereby.
4.3. SERIAL PREFERRED STOCK.
(a) ISSUANCE, DESIGNATIONS, POWERS, ETC.
The Board of Directors expressly is authorized, subject to
limitations prescribed by the Delaware General Corporation Law and the
provisions of this Amended and Restated Certificate of Incorporation, by
resolution or resolutions from time to time adopted and by filing a certificate
of designations pursuant to the Delaware General Corporation Law, to provide
for the issuance from time to time of the Serial Preferred Stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences and other
rights of the shares of each such series and to fix the qualifications,
limitations and restrictions thereon, including, but without limiting the
generality of the foregoing, the following:
(i) the number of shares constituting that series
and the distinctive designation of that series;
(ii) the dividend rate on the shares of that
series, whether dividends shall be cumulative, and, if so,
from which date or dates, and the relative rights of priority,
if any, of payment of dividends on shares of that series;
(iii) whether that series shall have voting rights,
in addition to voting the voting rights provided by law, and,
if so, the terms of such voting rights;
(iv) whether that series shall have conversion
privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the
conversion rate in such events as the Board of Directors shall
determine;
(v) whether or not the shares of that series
shall be redeemable, and, if so, the terms and conditions of
such redemption, including the dates upon or after which they
shall be redeemable, and the amount per share payable in case
of redemption, which amount may vary under different
conditions and at different redemption dates;
(vi) whether that series shall have a sinking fund
for the redemption or purchase of shares of that series, and,
if so, the terms and amount of such sinking fund;
(vii) the rights of the shares of that series in
the event of voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, and the relative rights of
priority, if any, of payment of shares of that series; and
(viii) any other relative powers, preferences, and
rights of that series, and qualifications, limitations or
restrictions on that series.
4
<PAGE> 5
(b) DISSOLUTION, LIQUIDATION, WINDING UP.
In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of record of the
Preferred Stock of each series shall be entitled to receive only such amount or
amounts as shall have been fixed by the certificate of designations or by the
resolution or resolutions of the Board of Directors providing for the issuance
of such series.
4.4. ADJUSTMENTS OF AUTHORIZED STOCK.
Except as provided to the contrary in the provisions
establishing a class or series of stock, the amount of the authorized stock of
the Corporation of any class or classes may be increased or decreased (but not
below the number then outstanding) by the affirmative vote of a majority of the
directors then in office, whether or not a quorum.
4.5. PREEMPTIVE RIGHTS.
Holders of the capital stock of the Corporation shall not be
entitled to preemptive rights with respect to any shares or other securities of
the Corporation which may be issued.
5. BOARD OF DIRECTORS.
5.1. CLASSIFICATION.
The Board of Directors shall consist of not less than six
directors nor more than 15 directors. The number of directors of the
Corporation shall be as fixed from time to time by or pursuant to the Bylaws of
the Corporation. The directors, other than those who may be elected by the
holders of any series of Preferred Stock voting separately by series, shall be
classified, with respect to the time for which they severally hold office, into
three classes, Class I, Class II and Class III. When the number of directors is
changed, the Board of Directors shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned, provided
that the directors in each class shall be as nearly equal in number as
possible, and provided further, that no decrease in the number of directors
shall affect the term of any director then in office.
The classification shall be such that the term of one class
shall expire each succeeding year. The terms, classifications, qualifications
and election of the Board of Directors and the filling of vacancies thereon
shall be as provided herein and in the Bylaws. Each initial director in Class I
shall hold office for a term expiring at the 1997 annual meeting of
stockholders, each initial director in Class II shall hold office initially for
a term expiring at the 1996 annual meeting of stockholders, and each initial
director in Class III shall hold office for a term expiring at the 1995 annual
meeting of stockholders. Notwithstanding the foregoing provisions of this
Section 5.1, each director shall serve until such director's successor is duly
elected and qualified or until such director's earlier death, resignation or
removal. At each annual meeting of stockholders, the successors to the class of
directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third
year following the year of their election and until their successors have been
duly elected and qualified or until any such director's earlier death,
resignation or removal.
5.2. REMOVAL.
Except as otherwise provided pursuant to the provisions of
this Amended and Restated Certificate of Incorporation or a certificate of
designations relating to the rights of the holders of any series of Preferred
Stock, voting separately by series, to elect directors under specified
circumstances, any director or directors may be removed from office at any
time, but only for cause and only by the affirmative vote, at a special meeting
of the stockholders called for such a purpose, of not less than 66-2/3 percent
of the total number of votes of the then outstanding shares of stock of the
Corporation entitled to vote generally in the election of directors, voting
together
5
<PAGE> 6
as a single class, but only if notice of such proposal was contained in the
notice of such meeting. At least 30 days prior to such special meeting of
stockholders, written notice shall be sent to the director or directors whose
removal will be considered at such meeting.
For purposes of this Section 5.2, "Cause" shall mean (a)
conduct as a director of the Corporation or any subsidiary involving willful
material misconduct, breach of material fiduciary duty involving personal
profit, or gross negligence as to material duties, or (b) conduct, whether or
not as a director of the Corporation or any subsidiary, involving dishonesty or
breach of trust which is punishable by imprisonment for a term exceeding one
year under state or federal law.
Any vacancy in the Board of Directors, including any vacancy
created by reason of an increase in the number of directors, shall be filled
for the unexpired term by the 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 be elected and qualified, or until such director's earlier
death, resignation or removal.
5.3. CHANGE OF AUTHORIZED NUMBER.
In the event of any increase or decrease in the authorized
number of directors, the newly created or eliminated directorships resulting
from such increase or decrease shall be apportioned by the Board of Directors
among the three classes of directors so as to maintain such classes as nearly
equal as possible. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
5.4. DIRECTORS ELECTED BY HOLDERS OF PREFERRED STOCK.
Notwithstanding the foregoing, whenever the holders of any one
or more series of Preferred Stock issued by the Corporation shall have the
right, voting separately by series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of this
Amended and Restated Certificate of Incorporation or a certificate of
designations applicable thereto, and such directors so elected shall not be
divided into classes pursuant to this Article 5 unless expressly provided by
the certificate of designations.
5.5. LIMITATION OF LIABILITY.
No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, provided that this provision shall not eliminate
or limit the liability of a director (a) for any breach of the director's duty
of loyalty to the Corporation or its stockholders; (b) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (c) for the types of liability set forth in Section 174 of
the Delaware General Corporation Law; or (d) for any transaction from which the
director derived an improper personal benefit. Any repeal or modification of
this Section 5.5 by the stockholders of the Corporation shall be prospective
only, and shall not adversely affect limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or modification
with respect to acts or omissions occurring prior to the effective date of such
repeal or modification.
6. ACTIONS BY STOCKHOLDERS.
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 consent is unanimous.
6
<PAGE> 7
7. SPECIAL MEETINGS.
Special meetings of the stockholders may be called at any time
but only by (a) the Chairman of the Board of the Corporation, (b) a majority of
the directors in office, although less than a quorum, or (c) the holders of not
less than 50 percent of the Voting Stock (as defined in Section 8.3 of Article
8 hereof).
8. APPROVAL FOR ACQUISITIONS OF CONTROL AND OFFERS TO ACQUIRE CONTROL.
8.1. STOCKHOLDER VOTE AND REGULATORY APPROVAL REQUIRED FOR
ACQUISITION OF CONTROL.
No Person shall acquire Control of the Corporation at any
time, unless such acquisition has been approved prior to its consummation by
the affirmative vote of the holders of at least 66-2/3 percent of the Voting
Stock at a duly constituted meeting of stockholders called for such purpose.
(Capitalized terms are defined in Section 8.3 hereof.) In addition, no Person
shall acquire Control of the Corporation at any time without obtaining prior
thereto all federal and state regulatory approvals, including those approvals
required under the Home Owners' Loan Act and Federal Deposit Insurance Act, any
applicable state law, or any successor provisions of law, and in the manner
provided by all applicable regulations of the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation, and any applicable state regulations. In
the event that Control is acquired without obtaining all such regulatory
approvals, such acquisition shall constitute a violation of this Article 8 and
the Corporation shall be entitled to institute a private right of action to
enforce such statutory and regulatory provisions.
8.2. EXCESS SHARES.
In the event that Control of the Corporation is acquired in
violation of this Article 8, all shares of Voting Stock owned by the Person so
acquiring Control in excess of the number of shares the beneficial ownership of
which is deemed under Section 8.3 hereof to confer Control of the Corporation
shall be considered from and after the date of their acquisition by such Person
to be "excess shares" for purposes of this Article 8. Such Excess Shares shall
thereafter no longer (a) be entitled to vote on any matter, (b) be entitled to
take other stockholder action, (c) be entitled to be counted in determining the
total number of outstanding shares for purposes of any matter involving
stockholder action, or (d) be transferable except with the approval of the
Board of Directors or by an independent trustee appointed by the Board of
Directors for the purpose of having such excess shares sold on the open market
or otherwise. The proceeds from the sale by the trustee of such excess shares
shall be paid (i) first, to the trustee in the amount equal to the trustee's
reasonable fees and expenses, (ii) second, to the "Beneficial Owner" (as
defined in Section 11.3 of Article 11, hereof) of such excess shares in an
amount up to such owner's federal income tax basis in such excess shares, and
(iii) third, to the Corporation as to any remaining balance.
8.3. CERTAIN DEFINITIONS.
For purposes of this Article 8:
"Control" means the sole or shared power to vote or direct the
voting of, or to dispose or to direct the disposition of 25 percent or more of
the Voting Stock; provided, that the solicitation, holding and voting of
proxies obtained by the Board of Directors of the Corporation pursuant to a
solicitation under Regulation 14A of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") shall not
constitute "control"; and provided further, that an investment advisor shall
not be deemed to acquire the Voting Stock of its advisee if the advisor (a)
votes the stock only upon instruction from the Beneficial Owner, and (b) does
not provide the Beneficial Owner with advice concerning the voting of such
stock.
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"Group Acting in Concert" includes Persons seeking to combine
or pool their voting or other interests in the Voting Stock for a common
purpose, pursuant to any contracts, understanding, relationship, agreement or
other arrangement, whether written or otherwise; provided, that a "Group Acting
in Concert" shall not include the Board of Directors of the Corporation in its
solicitation, holding and voting of proxies obtained by it pursuant to a
solicitation under Regulation 14A of the General Rules and Regulations under
the Exchange Act.
"Person" means any individual, firm, corporation or other
entity including a Group Acting in Concert.
"Voting Stock" means the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors.
8.4. INAPPLICABILITY TO MET HOLDINGS CORPORATION, PUBLIC
OFFERING OR EMPLOYEE BENEFIT PLANS.
This Article 8 shall not apply to an acquisition or offer to
acquire securities of the Corporation (a) by MET Holdings Corporation, or any
successor thereto; (b) by underwriters in connection with a public offering of
such securities or (c) by any employee stock purchase plan, pension plan,
profit sharing plan or other employee benefit plan of the Corporation or any of
its subsidiaries.
9. CONTROL SHARE ACQUISITIONS
9.1. ACQUIRING PERSON STATEMENT.
Any person who proposes to make or has made a Control Share
Acquisition (as defined in Section 9.7 hereof), may at the person's election
deliver an acquiring person statement to the Corporation at the Corporation's
principal office. The acquiring person statement must set forth all of the
following:
(a) The identity of the acquiring person and each other
member of any group of which the person is a part for purposes of
determining Control Shares.
(b) A statement that the acquiring person statement is
given pursuant to this Article 9.
(c) The number of shares of the Corporation owned
(directly or indirectly) by the acquiring person and each other member
of the group.
(d) The range of voting power under which the Control
Share Acquisition falls or would, if consummated, fall.
(e) If the Control Share Acquisition has not taken place:
(i) a description in reasonable detail of the
terms of the proposed Control Share Acquisition; and
(ii) representations of the acquiring person,
together with a statement in reasonable detail of the facts
upon which they are based, that the proposed Control Share
Acquisition, if consummated, will not be contrary to law and
that the acquiring person has the financial capacity to make
the proposed Control Share Acquisition.
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9.2. SPECIAL MEETING OF STOCKHOLDERS.
If the acquiring person so requests at the time of delivery of
an acquiring person statement and gives an undertaking to pay the Corporation's
expenses of a special meeting, within 10 days thereafter, the directors of the
Corporation shall call a special meeting of the stockholders of the
Corporation, to take place not sooner than 30 days after the receipt by the
Corporation of the acquiring person statement, for the purpose of considering
the voting rights to be accorded to the shares acquired or to be acquired in
the Control Share Acquisition. Unless the acquiring person agrees in writing to
another date, the special meeting of the stockholders shall be held within 50
days after the receipt by the Corporation of the request. If no request for a
special meeting is made, the voting rights to be accorded the shares acquired
in the Control Share Acquisition shall be presented at the next special or
annual meeting of stockholders.
9.3. NOTICE.
If a special meeting is requested, notice of the special
meeting of stockholders shall be given as promptly as reasonably practicable by
the Corporation to all stockholders of record as of the record date set for the
meeting, whether or not entitled to vote at the meeting. Notice of the special
or annual stockholder meeting at which the voting rights are to be considered
must include or be accompanied by both of the following:
(a) a copy of the acquiring person statement delivered to
the Corporation pursuant to this Article 9.
(b) a statement by the Board of Directors of the
Corporation, authorized by its directors, of its position or recommendation, or
that it is taking no position or making no recommendation, with respect to the
proposed Control Share Acquisition.
9.4. VOTING RIGHTS.
Control Shares (as defined in Section 9.7 hereof) acquired in
a Control Share Acquisition have the same voting rights as were accorded the
shares before the Control Share Acquisition only to the extent granted by
resolutions approved by a majority of the then outstanding shares of stock of
the Corporation entitled to vote generally in the election of directors other
than Interested Shares (as defined in Section 9.7 hereof). Interested Shares
shall not be entitled to vote on the matter, and in determining whether a
quorum exists, all Interested Shares shall be disregarded. For the purpose of
this Section 9.4, the Interested Shares shall be determined as of the record
date for determining the stockholders entitled to vote at the meeting.
9.5. REDEMPTION.
Control Shares acquired in a Control Share Acquisition with
respect to which no acquiring person statement has been filed with the
Corporation may, at any time during the period ending 60 days after the last
acquisition of Control Shares by the acquiring person, be subject to redemption
by the Corporation at the redemption price equal to the number of such shares
multiplied by the dollar amount (rounded to the nearest cent) equal to the
average per share price, including any brokerage commissions, transfer taxes
and soliciting dealers' fees, paid by the acquiring person for such shares.
Control Shares acquired in a Control Share Acquisition are not subject to
redemption after an acquiring person statement has been filed unless the shares
are not accorded full voting rights by the stockholders as provided in Section
9.4 above. In order to determine the redemption price provided for in this
Section 9.5, the Corporation may rely conclusively on public announcements by,
or filings with the Securities and Exchange Commission by, the acquiring person
as to the prices so paid.
9.6. DISSENTERS RIGHTS.
In the event Control Shares acquired in a Control Share
Acquisition are accorded full voting rights and the acquiring person has
acquired Control Shares with a majority or more of all voting power, all
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stockholders of the Corporation, other than the acquiring person, have the
right to dissent from the granting of voting rights and to demand payment of
the fair value of their shares under Section 262 of the Delaware General
Corporation Law as though such granting of voting rights were a corporate
action described in paragraph (b) of Section 262, except that the provisions of
subsection (1) of paragraph (b) of Section 262 shall not be applicable. For
purposes of this Section 9.6, "fair value" of shares under Section 262 of the
Delaware General Corporation Law shall in no event be less than the highest
price per share paid in the Control Share Acquisition, as adjusted for any
subsequent stock dividends or reverse stock splits or similar changes.
9.7. CERTAIN DEFINITIONS.
For purposes of this Article 9:
"Control Share" means shares of the Corporation that would
have voting power that when added to all the other shares of the Corporation
owned by a person or in respect to which that person may exercise or direct the
exercise of voting power, would entitle that person, immediately after
acquisition of the shares (directly or indirectly, alone or as part of a
group), to exercise or direct the exercise of the voting power of the
Corporation in the election of directors within any of the following ranges of
voting power: (a) one-fifth or more but less than a third of all voting power;
(b) one-third or more but less than a majority of all voting power; or (c) a
majority or more of all voting power.
"Control Share Acquisition" means the acquisition (directly or
indirectly) by any person of ownership of, or the power to direct the exercise
of voting power with respect to, issued and outstanding Control Shares. Shares
acquired within 90 days of a prior acquisition or shares acquired pursuant to a
plan to make a Control Share Acquisition are considered to have been acquired
in the same acquisition. The acquisition of any shares of the Corporation does
not constitute a Control Share Acquisition if the acquisition is consummated in
any of the following circumstances: (a) before March 31, 1994; (b) pursuant to
a binding contract existing before March 31, 1994; (c) pursuant to the laws of
descent and distribution; (d) pursuant to the satisfaction of a pledge or other
security interest created in good faith and not for the purpose of
circumventing this Article 9; (e) pursuant to a merger or plan of share
exchange if the Corporation is a party to the agreement of merger or plan of
share exchange; (f) pursuant to a tender or exchange offer that is made
pursuant to an agreement to which the Corporation is a party, or directly from
the Corporation, or from any of its wholly owned subsidiaries, or (g) by MET
Holdings Corporation or any successor thereto.
The acquisition of any shares of the Corporation in good faith
and not for the purpose of circumventing this Article 9 by or from (i) any
person whose voting rights had previously been authorized by stockholders in
compliance with this Article 9, or (ii) any person whose previous acquisition
of shares of the Corporation would have constituted a Control Share Acquisition
but for the circumstances specified in the paragraph above, does not constitute
a Control Share Acquisition, unless the acquisition entitles the person
(directly or indirectly, alone or as a part of a group) to exercise or direct
the exercise of voting power of the Corporation in the election of directors in
excess of the voting power otherwise authorized.
For purposes of this Article 9, a person who acquires shares
in the ordinary course of business for the benefit of others in good faith and
not for the purpose of circumventing this Article 9 has voting power only of
shares in respect of which that Person would be able to exercise or direct the
vote without further instruction from others.
"Interested Shares" mean the shares of the Corporation in
respect of which any of the following persons may exercise or direct the
exercise of the voting power of the Corporation in the election of directors:
(a) an acquiring person or member of a group with respect to a Control Share
Acquisition; (b) any officer of the Corporation; (c) any employee of the
Corporation who is also a director of the Corporation.
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10. CRITERIA FOR EVALUATING CERTAIN OFFERS.
The Board of Directors, when evaluating any offer of another
party to (a) make a tender or exchange offer for any equity security of the
Corporation, (b) merge or consolidate the Corporation with another institution,
or (c) purchase or otherwise acquire all or substantially all of the properties
and assets of the Corporation, shall, in connection with the exercise of its
judgment in determining what is in the best interests of the Corporation and
its stockholders, be authorized to give due consideration to any such factors
as the Board of Directors determines to be relevant, including, without
limitation, the economic effects of acceptance of such offer on (i) depositors,
borrowers and employees of the insured institution subsidiary or subsidiaries
of the Corporation, and on the communities in which such subsidiary or
subsidiaries operate or are located and (ii) the ability of such subsidiary or
subsidiaries to fulfill the objectives of an insured institution under
applicable Federal statutes and regulations.
11. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.
11.1. HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS.
In addition to any affirmative vote required by law or this
Amended and Restated Certificate of Incorporation, and except as otherwise
expressly provided in Section 11.2 hereof:
(a) any merger, consolidation or share exchange of the
Corporation or any Subsidiary with (i) any Interested Stockholder or
(ii) any other corporation (whether or not itself an Interested
Stockholder) which is, or after the merger, consolidation or share
exchange would be, an Affiliate or Associate of such Interested
Stockholder prior to the transaction (capitalized terms are defined in
Section 11.3 hereof);
(b) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition other than in the usual and regular course of
business (in one transaction or a series of transactions in any
12-month period) to any Interested Stockholder or any Affiliate or
Associate of such Interested Stockholder, other than the Corporation
or any of its Subsidiaries, of any assets of the Corporation or any
Subsidiary that have an aggregate book value as of the end of the
Corporation's most recent fiscal quarter of 10 percent or more of the
total Market Value of the outstanding shares of the Corporation or of
its net worth as of the end of its most recent fiscal quarter,
measured at the time the transaction (or transactions) is (are)
approved by the Board of Directors of the Corporation;
(c) any issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of any
equity securities of the Corporation or any Subsidiary having an
aggregate Market Value of five percent or more of the total Market
Value of the outstanding shares of the Corporation or such Subsidiary
to any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder, other than the Corporation or any of its
Subsidiaries, except pursuant to the exercise of warrants, rights or
options to subscribe for or purchase securities offered, issued or
granted pro rata to all holders of the Voting Stock of the Corporation
or any other method affording substantially proportionate treatment to
the holders of Voting Stock;
(d) any adoption of any plan or proposal for the
liquidation or dissolution of the Corporation or any Subsidiary
proposed by or on behalf of an Interested Stockholder or any Affiliate
or Associate of such Interested Stockholder, other than the
Corporation or any of its Subsidiaries; or
(e) any reclassification of securities (including any
reverse stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries or any other transaction (whether or not with or into or
otherwise involving an Interested Stockholder) which has the effect,
directly or indirectly, in one transaction or a series of
transactions, of increasing the proportionate amount of the
outstanding shares of any class of equity or convertible securities of
the Corporation or any Subsidiary which is directly or indirectly
owned by any Interested Stockholder or any Affiliate or Associate of
any Interested Stockholder, other than the Corporation or any of its
Subsidiaries;
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shall be approved by the affirmative vote of at least (i) the holders of 80
percent 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 Voting
Stock, excluding for purposes of calculating the affirmative vote and the total
number of outstanding shares of Voting Stock under this clause (ii), all shares
of Voting Stock of which the beneficial owner is the Interested Shareholder
involved in the Business Combination or any Affiliate or Associate of such
Interested Shareholder. Such affirmative vote shall be required notwithstanding
the fact that no vote may be required, or that a lesser percentage may be
specified, by law or this Amended and Restated Certificate of Incorporation.
"Business Combination" means any transaction which is referred
to in any one or more of clauses (a) through (e) of this Section 11.1.
11.2. WHEN HIGHER VOTE IS NOT REQUIRED.
The provisions of Section 11.1 hereof shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by law and any other
provision of this Amended and Restated Certificate of Incorporation, if the
condition or conditions specified in either paragraph (a) or paragraph (b)
below are met:
(a) APPROVAL BY CONTINUING DIRECTORS.
The Business Combination shall have been approved by at least
two-thirds of the Continuing Directors then in office at a duly constituted
meeting of the Board of Directors called for such purpose.
(b) PRICE AND PROCEDURE REQUIREMENTS.
All of the following conditions shall have been met:
(i) The aggregate amount of the cash and of the
Market Value as of the Valuation Date of consideration other
than cash to be received per share by holders of Common Stock
in such Business Combination shall be at least equal to the
highest of the following:
(A) the highest per share price
(including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by the Interested
Stockholder for any shares of Common Stock acquired
by it (1) within the two-year period immediately
prior to the first public announcement of the
proposal of the Business Combination (the
"Announcement Date") or (2) in the transaction in
which it became an Interested Stockholder, whichever
is higher;
(B) the Market Value per share of Common
Stock on the Announcement Date or on the date on
which the Interested Stockholder became an Interested
Stockholder (such latter date is referred to in this
Article 11 as the "Determination Date"), whichever is
higher; or
(C) the price per share equal to the
Market Value per share of Common Stock determined
pursuant to subdivision (i)(B) hereof, multiplied by
the fraction of (1) the highest per share price
(including brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested
Stockholder for any shares of common stock of the
same class or series acquired by it within the
two-year period immediately prior to the Announcement
Date, over (2) the Market Value per share of common
stock of the same class or series on the first day in
such two-year period on which the Interested
Stockholder acquired shares of Common Stock.
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(ii) The aggregate amount of the cash and the
Market Value as of the Valuation Date of consideration other
than cash to be received per share by holders of shares of any
class or series of outstanding Voting Stock, other than Common
Stock, shall be at least equal to the highest of the following
(it being intended that the requirements of this paragraph
(b)(ii) shall be required to be met with respect to every
class of outstanding Voting Stock, other than Common Stock,
whether or not the Interested Stockholder has previously
acquired any shares of a particular class of Voting Stock):
(A) the highest per share price
(including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by the Interested
Stockholder for any shares of such class or series of
Voting Stock acquired by it: (1) within the two-year
period immediately prior to the Announcement Date or
(2) in the transaction in which it became an
Interested Stockholder, whichever is higher;
(B) the highest preferential amount per
share to which the holders of shares of such class or
series of Voting Stock are entitled in the event of
any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, or in the event of
any call of such class or series of Voting Stock;
(C) the Market Value per share of such
class or series of Voting Stock on the Announcement
Date or on the Determination Date, whichever is
higher; or
(D) the price per share equal to the
Market Value per share of such class or series of
stock determined pursuant to subdivision (ii)(C)
hereof, multiplied by the fraction of (1) the highest
per share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid by
the Interested Stockholder for any shares of any
class or series of Voting Stock acquired by it within
the two-year period immediately prior to the
Announcement Date over (2) the Market Value per share
of the same class or series of Voting Stock on the
first day in such two-year period on which the
Interested Stockholder acquired any shares of the
same class or series of Voting Stock.
(iii) The consideration to be received by holders
of a particular class or series of outstanding Voting Stock
shall be in cash or in the same form, and on the same terms,
as the Interested Stockholder has previously paid for shares
of such class or series of Voting Stock. If the Interested
Stockholder has paid for shares of any class or series of
Voting Stock with varying forms of consideration, on varying
terms, the form and terms of consideration for such class or
series of Voting Stock shall be either cash or the form and
terms used to acquire the largest number of shares of such
class or series of Voting Stock previously acquired by it.
(iv) After such Interested Stockholder has become
an Interested Stockholder and prior to the consummation of
such Business Combination: (A) there shall have been no
failure to declare and pay at the regular date therefor any
full quarterly dividends (whether or not cumulative) on any
outstanding Preferred Stock of the Corporation; (B) there
shall have been (1) no reduction in the annual rate of
dividends paid on any class or series of the capital stock of
the Corporation, (except as necessary to deflect any
subdivision of the capital stock), and (2) an increase in such
annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction
which has the effect of reducing the number of outstanding
shares of Common Stock; and (C) such Interested Stockholder
shall not have become the beneficial owner of any additional
shares of capital stock except as part of the transaction
which results in such Interested Shareholder becoming an
Interested Stockholder or by virtue of proportionate stock
splits or stock dividends.
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The provisions of subdivisions (iv)(A) and (iv)(B) of
this subsection do not apply if the Interested Stockholder or
any Affiliate or Associate of the Interested Stockholder voted
as a director of the Corporation in a manner consistent with
such subdivisions, and the Interested Stockholder, within 10
days after any act or failure to act by or on behalf of the
Corporation, which act or failure to act is inconsistent with
such subdivisions, notifies the Board of Directors of the
Corporation in writing that the Interested Stockholder
disapproves thereof and requests in good faith that the Board
of Directors rectify such act or failure to act.
(v) After such Interested Stockholder has become
an Interested Stockholder, such Interested Stockholder shall
not have received the benefit, directly or indirectly (except
proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Corporation or
any of its Subsidiaries (whether in anticipation of or in
connection with such Business Combination or otherwise).
(vi) A proxy or information statement describing
the proposed Business Combination and complying with the
requirements of the Exchange Act and the rules and regulations
thereunder (or any subsequent provisions replacing the
Exchange Act, rules or regulations) shall be mailed to public
stockholders of the Corporation at least 20 days prior to the
consummation of such Business Combination (whether or not such
proxy or information statement is required to be mailed
pursuant to the Exchange Act or subsequent provisions).
11.3. CERTAIN DEFINITIONS.
For the purposes of this Article 11:
"Affiliate" means a person that directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, a specified person.
"Associate," when used to indicate a relationship with any
person, means: (a) any domestic or foreign corporation or organization, other
than the Corporation or a subsidiary of the Corporation, of which such person
is an officer, director or partner or is, directly or indirectly, the
beneficial owner of 10 percent or more of any class of equity securities; (b)
any trust or other estate, other than an employee stock purchase plan, pension
plan, profit sharing plan or other employee benefit plan of the Corporation or
any Subsidiary, in which such person has a substantial beneficial interest or
as to which such person serves as a trustee or in a similar fiduciary capacity;
and (c) any relative or spouse of such person, or any relative of such spouse
who has the same home as such person or who is a director or officer of the
Corporation or any of its Affiliates.
"Beneficial Owner," when used with respect to any Voting
Stock, means any person that:
(a) individually or with any of its Affiliates or
Associates, beneficially owns Voting Stock directly or indirectly;
(b) individually or with any of its Affiliates or
Associates, has (i) the right to acquire Voting Stock (whether such
right is exercisable immediately or only after passage of time),
pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options,
or otherwise; (ii) the right to vote or direct the voting of Voting
Stock pursuant to any agreement, arrangement or understanding; or
(iii) the right to dispose of or to direct the disposition of Voting
Stock pursuant to any agreement, arrangement or understanding; or
(c) individually or with any of its Affiliates or
Associates, has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of Voting Stock
with any other
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person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, such shares of Voting Stock.
"Continuing Director" means any member of the Board of
Directors of the Corporation who is unaffiliated with the Interested
Stockholder and was a member of the Board of Directors of the Corporation prior
to the time that the Interested Stockholder (including any Affiliate or
Associate of such Interested Stockholder) became an Interested Stockholder, and
any successor of a Continuing Director who is unaffiliated with the Interested
Stockholder and is recommended to succeed a Continuing Director by a majority
of Continuing Directors then on the Board of Directors of the Corporation.
"Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary or any employee stock purchase plan, pension
plan, profit sharing plan or other employee benefit plan of the Corporation or
any Subsidiary) that (a) is the beneficial owner, directly or indirectly, of
five percent or more of the voting power of the then outstanding Voting Stock;
or (b) is an Affiliate of the Corporation and at any time within the two-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of ten percent or more of the voting power of the then
outstanding Voting Stock. For the purposes of determining whether a person is
an Interested Stockholder, the number of shares of Voting Stock deemed to be
outstanding shall include the shares with respect to which such person is the
beneficial owner, as defined above, except it shall not include any shares of
Voting Stock which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
"Market Value" means:
(a) in the case of stock, the highest closing sale price
during the 30-day period immediately preceding the date in question of
a share of such stock on the established national or regional stock
exchange on which it is listed, or, if such stock is not listed on any
such exchange, the highest closing sales price or bid quotation with
respect to a share of such stock during the 30-day period preceding
the date in question on the National Association of Securities
Dealers, Inc. Automated Quotation System or any system then in use, or
if no such quotations are available, the fair market value on the date
in question of a share of such stock as determined by the Board of
Directors of the Corporation in good faith; and
(b) in the case of property other than cash or stock, the
fair market value of such property on the date in question as
determined by a majority of the Board of Directors of the Corporation
in good faith.
"Subsidiary" means any corporation of which the Corporation
owns, directly or indirectly, the majority of the Voting Stock.
"Valuation Date" means: (a) For a Business Combination voted
on by shareholders, the latter of the day prior to the date of the
shareholders' vote or the date 10 days prior to the consummation of the
Business Combination; and (b) for a Business Combination not voted upon by the
shareholders, the date of the consummation of the Business Combination.
"Voting Stock" means the then outstanding shares of capital
stock of the Corporation or Subsidiary, as the case may be, entitled to vote
generally in the election of directors.
In the event of any Business Combination in which the
Corporation is the surviving corporation, the phrase "consideration other than
cash to be received" as used in paragraphs (b)(i) and (b)(ii) of Section 11.2
hereof shall include the shares of Common Stock and/or the shares of any other
class or series of outstanding Voting Stock retained by the holders of such
shares.
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11.4. POWERS OF THE BOARD OF DIRECTORS.
A majority of the Corporation's directors then in office shall
have the power and duty to determine for the purposes of this Article 11, on
the basis of information known to them after reasonable inquiry, (a) whether a
person is an Interested Stockholder, (b) the number of shares of Voting Stock
beneficially owned by any person, (c) whether a person is an Affiliate or
Associate of another, and (d) whether the requirements of paragraph (b) of
Section 11.2 have been met with respect to any Business Combination; and the
good faith determination of a majority of the Board of Directors on such
matters shall be conclusive and binding for all the purposes of this Article
11.
11.5. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED
STOCKHOLDERS.
Nothing contained in this Article 11 shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
12. INDEMNIFICATION.
To the extent permitted by law, the Corporation shall fully
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 (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
corporation, 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.
To the extent permitted by law, the Corporation may fully
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 (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was an employee or agent of the Corporation, or is or was
serving at the request of the Corporation as an employee or agent of another
corporation, 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.
The Corporation may advance expenses (including attorneys'
fees) incurred by a director or officer in advance of the final disposition of
such action, suit or proceeding upon the receipt of an undertaking by or on
behalf of the director or officer to repay such amount if it shall ultimately
be determined that such director or officer is not entitled to indemnification.
The Corporation may advance expenses (including attorneys' fees) incurred by an
employee or agent in advance of the final disposition of such action, suit or
proceeding upon such terms and conditions, if any, as the Board of Directors
deems appropriate.
13. AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION.
Except as set forth in this Article 13 or as otherwise
specifically required by law, no amendment of any provision of this Amended and
Restated Certificate of Incorporation shall be made unless such amendment has
been first proposed by the Board of Directors of the Corporation upon the
affirmative vote of at least two-thirds of the directors then in office at a
duly constituted meeting of the Board of Directors called for such purpose, and
thereafter approved by the stockholders of the Corporation by the affirmative
vote of the holders of at least a majority of the shares entitled to vote
thereon at a duly called annual or special meeting; provided, however, that if
such amendment is to the provisions set forth in this Article 13 or in Article
5, 6, 7, 8, 9, 10, or 12 hereof, such amendment must be approved by the
affirmative vote of the holders of at least 66-2/3 percent of the then
outstanding shares of stock of the Corporation entitled to vote thereon rather
than a majority; provided, further, that if such amendment is to the provisions
set forth in Article 11 hereof, such amendment must be approved by the
affirmative vote of the holders of at least 80 percent of the shares entitled
to vote thereon rather than a majority.
16
<PAGE> 17
14. AMENDMENT OF BYLAWS.
In furtherance and not in limitation of the powers conferred
by the Delaware General Corporation Law, the Board of Directors is expressly
authorized and empowered to adopt, amend and repeal the Bylaws of the
Corporation, subject to the right of the stockholders entitled to vote with
respect thereto to amend or repeal Bylaws adopted by the Board of Directors as
provided for in this Amended and Restated Certificate of Incorporation or in
the Bylaws of the Corporation.
17
<PAGE> 18
IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restated Certificate of Incorporation to be executed on its behalf on May
28, 1997.
TELEBANC FINANCIAL CORPORATION
By: /s/ Mitchell H. Caplan
----------------------------------
Mitchell H. Caplan
President and Vice Chairman of the
Board
Attest:
By: /s/ Sang-Hee Yi
-------------------------
Sang-Hee Yi
Assistant Secretary
18
<PAGE> 1
EXHIBIT 4.4
DECLARATION OF TRUST
OF
TELEBANC CAPITAL TRUST II
THIS DECLARATION OF TRUST is made as of May 22, 1998 (this
"Declaration"), by and among TeleBanc Financial Corporation, a Delaware
corporation, as sponsor (the "Sponsor"), Wilmington Trust Company, a Delaware
banking corporation, as Delaware trustee (the "Delaware Trustee") and Aileen
Lopez Pugh, David Smilow, and Mitchell Caplan, as administrative trustees (the
"Administrative Trustees," and, together with the Delaware Trustee, the
"Trustees"). The Sponsor and the Trustees hereby agree as follows:
1. The trust created hereby shall be known as "TeleBanc Capital
Trust II" (the "Trust"), in which name the Trustees or the Sponsor, to the
extent provided herein, may conduct the business of the Trust, make and execute
contracts, and sue and be sued.
2. The Sponsor hereby assigns, transfers, conveys and sets over to
the Trustees the sum of $10. The Trustees hereby acknowledge receipt of such
amount in trust from the Sponsor, which amount shall constitute the initial
trust estate. The Trustees hereby declare that they will hold the trust estate
in trust for the Sponsor. It is the intention of the parties hereto that the
Trust created hereby constitute a business trust under Chapter 38 of Title 12 of
the Delaware Code, 12 Del. C. Section 3801, et seq. (the "Business Trust Act"),
and that this document constitute the governing instrument of the Trust. The
Trustees are hereby authorized and directed to execute and file a certificate of
trust with the Delaware Secretary of State in such form as the Trustees may
approve.
3. The Sponsor and the Trustees will enter into an amended and
restated Declaration of Trust satisfactory to each such party to provide for the
contemplated operation of the Trust created hereby and the issuance of the
Series A Capital Securities and Series A Common Securities referred to therein.
Prior to the execution and delivery of such amended and restated Declaration of
Trust (i) the Delaware Trustee shall not have any duty or obligation hereunder
or with respect to the trust estate, except as otherwise required by applicable
law, and (ii) the Administrative Trustees and the Sponsor shall take any action
as may be necessary to obtain prior to such execution and delivery any licenses,
consents or approvals required by applicable law or otherwise. Notwithstanding
the foregoing, the Trustees may take all actions deemed proper as are necessary
to effect the transactions contemplated herein.
4. The Sponsor hereby agrees to (i) reimburse the Trustees for all
reasonable expenses (including reasonable fees and expenses of counsel and other
experts), (ii) indemnify, defend and hold harmless the Trustees and any of the
officers, directors, employees and agents of the Trustees (collectively,
including the Delaware
<PAGE> 2
Trustee in its individual capacity, the "Indemnified Persons") from and against
any and all losses, damages, liabilities, claims, actions, suits, costs,
expenses, disbursements (including the reasonable fees and expenses of counsel),
taxes and penalties of any kind and nature whatsoever (collectively,
"Expenses"), to the extent that such Expenses arise out of or are imposed upon
or asserted at any time against such Indemnified Persons with respect to the
performance of this Declaration, the creation, operation, administration or
termination of the Trust, or the transactions contemplated hereby; provided,
however, that the Sponsor shall not be required to indemnify an Indemnified
Person for Expenses to the extent such Expenses result from the willful
misconduct, bad faith or gross negligence of such Indemnified Person, and (iii)
advance to each Indemnified Person Expenses (including reasonable legal fees)
incurred by such Indemnified Person in defending any claim, demand, action, suit
or proceeding prior to the final disposition of such claim, demand, action, suit
or proceeding upon receipt by the Sponsor of an undertaking by or on behalf of
the Indemnified Person to repay such amount if it shall be determined that the
Indemnified Person is not entitled to be indemnified therefor under this Section
4.
5. The Sponsor, as sponsor of the Trust, and each Administrative
Trustee is hereby authorized, in its discretion, (i) to prepare and distribute
one or more registration statements, including a prospectus and prospectus
supplements and any amendment thereto, in preliminary and final form, relating
to the offering and sale of the Series A Capital Securities of the Trust under
the Securities Act of 1933, as amended (the "1933 Act"), and such forms or
filings as may be required by the 1933 Act, the Securities Exchange Act of 1934,
as amended, or the Trust Indenture Act of 1939, as amended, in each case
relating to the Series A Capital Securities of the Trust; (ii) to prepare,
execute and file on behalf of the Trust, such applications, reports, surety
bonds, irrevocable consents, appointments of attorney for service of process and
other papers and documents that shall be necessary or desirable to register or
establish the exemption from registration of the Series A Capital Securities of
the Trust under the securities or "Blue Sky" laws of such jurisdictions as the
Sponsor, on behalf of the Trust, may deem necessary or desirable; (iii) if and
at such time as determined by the Sponsor, to prepare, execute and file an
application, and all other applications, statements, certificates, agreements
and other instruments that shall be necessary or desirable, to have the Series A
Capital Securities listed on the Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") Market, with the New York Stock Exchange or any
other national stock exchange or the Nasdaq National Market for listing or
quotation of the Series A Capital Securities of the Trust; (iv) to prepare,
execute and deliver letters or documents to, or instruments for filing with, a
depository relating to the Series A Capital Securities of the Trust; (v) to
negotiate, execute, deliver and perform on behalf of the Trust one or more
underwriting agreements, trust agreements, guarantee agreements, indentures and
other similar or related agreements providing for or relating to the sale and
issuance of the Series A Capital Securities of the Trust and/or any other
interests in the Trust; and (vi) to prepare, execute and deliver on behalf of
the Trust any and all documents, papers and
<PAGE> 3
instruments as may be desirable in connection with any of the foregoing. Any
power of the Administrative Trustees hereunder to execute any document or take
other action on behalf of the Trust may be exercised by one Administrative
Trustee acting alone or by two or more Administrative Trustees acting together.
In the event that any filing referred to in this Section 5 is
required by the rules and regulations of Securities and Exchange Commission (the
"Commission"), PORTAL or state securities or Blue Sky laws to be executed on
behalf of the Trust by one or more Trustees, each Trustee, in its capacity as a
trustee of the Trust, so required to execute such filings is hereby authorized
and directed to join in any such filing and to execute on behalf of the Trust
any and all of the foregoing, it being understood that a Trustee, in its
capacity as a trustee of the Trust, shall not be required to join in any such
filing or execute on behalf of the Trust any such document unless required to do
so by the rules and regulations of the Commission, PORTAL or applicable state
securities or Blue Sky laws.
6. The Delaware Trustee shall take such action or refrain from
taking such action under this Declaration as it may be directed in writing by
the Sponsor from time to time; provided, however, that the Delaware Trustee
shall not be required to take or refrain from taking any such action if it shall
have determined, or shall have been advised by counsel, that such performance is
likely to involve the Delaware Trustee in personal liability or is contrary to
the terms of this Declaration or of any document contemplated hereby to which
the Trust or the Delaware Trustee is a party or is otherwise contrary to law. If
at any time the Delaware Trustee determines that it requires or desires guidance
regarding the application of any provision of this Declaration or any other
document, then the Delaware Trustee may deliver a notice to the Sponsor
requesting written instructions as to the course of action desired by the
Sponsor, and such instructions shall constitute full and complete authorization
and protection for actions taken by the Delaware Trustee in reliance thereon. If
the Delaware Trustee does not receive such instructions within five (5) business
days after it has delivered to the Sponsor such notice requesting instructions,
or such shorter period of time as may be set forth in such notice, it shall
refrain from taking any action with respect to the matters described in such
notice to the Sponsor.
7. This Declaration may be executed in one or more counterparts.
8. The number of trustees of the Trust initially shall be four (4)
and thereafter the number of trustees of the Trust shall be such number as shall
be fixed from time to time by a written instrument signed by the Sponsor which
may increase or decrease the number of trustees of the Trust; provided, however,
that to the extent required by the Business Trust Act, one trustee of the Trust
shall either be a natural person who is a resident of the State of Delaware or,
if not a natural person, an entity which has its principal place of business in
the State of Delaware and otherwise meets the requirements of applicable law.
Subject to the foregoing, the Sponsor is entitled to appoint or remove without
cause any trustee of the Trust at any time. Any trustee of
<PAGE> 4
the Trust may resign upon thirty days' prior notice to the Sponsor.
9. This Declaration shall be governed by, and construed in
accordance with, the laws of the State of Delaware (without regard to conflict
of laws principles).
[SIGNATURE PAGE FOLLOWS]
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Declaration
of Trust to be duly executed as of the day and year first above written.
TELEBANC FINANCIAL CORPORATION, as
Sponsor
By: /s/ Mitchell Caplan
---------------------------------------
Name: Mitchell Caplan
Title: President
WILMINGTON TRUST COMPANY, not in its
individual capacity but solely as Delaware
Trustee of the Trust
By: /s/ Wilmington Trust Company
---------------------------------------
Name:
Title:
Aileen Lopez Pugh, not in her individual
capacity but solely as Administrative
Trustee of the Trust
/s/ Aileen Lopez Pugh
------------------------------------------
David Smilow, not in his individual
capacity but solely as Administrative
Trustee of the Trust
/s/ David Smilow
------------------------------------------
Mitchell Caplan, not in his individual
capacity but solely as Administrative
Trustee of the Trust
/s/ Mitchell Caplan
------------------------------------------
<PAGE> 1
EXHIBIT 4.7
CERTIFICATE OF TRUST
OF
TELEBANC CAPITAL TRUST II
This Certificate of Trust of TeleBanc Capital Trust II is being
executed and filed by the undersigned, as trustees, for the purposes of forming
a business trust pursuant to the Delaware Business Trust Act (12 Del. C.
Sections 3801 et seq.).
1. Name. The name of the business trust formed hereby is "TeleBanc
Capital Trust II" (the "Trust").
2. Delaware Trustee. The name and business address of the trustee of the
Trust that has its principal place of business in the State of Delaware are as
follows:
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
IN WITNESS WHEREOF, the undersigned, being all of the initial
trustees of the Trust, have duly executed this Certificate of Trust.
WILMINGTON TRUST COMPANY
as Delaware Trustee
By: /s/ Wilmington Trust Company /s/ Aileen Lopez Pugh
------------------------------- ----------------------------------
Name: As Administrative Trustee
/s/ David Smilow /s/ Mitchell Caplan
- ---------------------------------- ----------------------------------
As Administrative Trustee As Administrative Trustee
<PAGE> 1
[SUBJECT TO THE REVIEW AND APPROVAL OF THE SPPT LEGAL OPINION
COMMITTEE]
EXHIBIT 5
[SPPT Letterhead]
__________________, 1998
TeleBanc Financial Corporation
1111 North Highland Street
Arlington, Virginia 22201
Ladies and Gentlemen:
We have acted as counsel for TeleBanc Financial Corporation, a
Delaware corporation (the "Company"), in connection with the registration of
3,220,000 shares (including 420,000 shares to cover the underwriters
over-allotment options, if exercised) of the Company's common stock, par value
$.01 per share (the "Shares"), pursuant to a Registration Statement on Form S-2
under the Securities Act of 1933, as amended (No. 333-52871) (the "Registration
Statement"), and with the proposed sale of the Shares to the public through
BancAmerica Robertson Stephens, CIBC Oppenheimer and Legg Mason Walker,
Incorporated, the underwriters of the offering. Of the maximum of 3,220,000
total Shares to be offered and sold, 2,800,000 Shares are to be offered by the
Company on a firm commitment underwritten basis, and 420,000 Shares will be
offered by the Company pursuant to a 30-day option granted to the underwriters
solely to cover over-allotments.
Based upon our examination of the originals or copies of such
documents, corporate records, certificates of officers of the Company and such
other instruments as we have deemed necessary, and upon the laws as presently
in effect, we are of the opinion that the Shares to be offered by the Company
pursuant to the Registration Statement have been duly authorized for issuance
by the Company and, upon issuance and delivery in accordance with the terms of
the underwriting agreement referred to in the Registration Statement, will be
validly issued, fully paid and non-assessable.
<PAGE> 2
TeleBanc Financial Corporation
_______________, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the prospectus that constitutes part of the Registration
Statement.
Very truly yours,
Shaw Pittman Potts & Trowbridge
<PAGE> 1
EXHIBIT 10.3
TELEBANC FINANCIAL CORPORATION
1998 STOCK INCENTIVE PLAN
ARTICLE I
PURPOSES
The Plan is intended to assist TeleBanc Financial Corporation and its
Affiliates in recruiting and retaining individuals with ability and initiative
by enabling such persons to participate in the future success of the Company
and its Affiliates and to associate their interests with those of the Company
and its stockholders. The Plan is intended to permit the grant of both Options
qualifying under Section 422 of the Code ("incentive stock options") and
Options not so qualifying, and the grant of SARs and Stock Awards. No Option
that is intended to be an Incentive Stock Option shall be invalid for failure
to qualify as an Incentive Stock Option. The proceeds received by the Company
from the sale of Common Stock pursuant to this Plan shall be used for general
corporate purposes.
ARTICLE II
DEFINITIONS
2.1. Affiliate means (i) any entity that directly or
indirectly, is controlled by, or controls or is under common control with the
Company, and (ii) any entity in which the Company has a significant equity
interest, in either case as determined by the Committee.
2.2. Agreement means a written agreement (including any
amendment or supplement thereto) between the Company and a Participant
specifying the terms and conditions of a Stock Award, Option or SAR granted to
such Participant.
2.3. Board means the Board of Directors of the Company.
2.4. Change of Control means:
(a) a "person" or "group" (which terms shall have
the meaning they have when used in Section 13(d) of the Exchange Act) (other
than the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, any corporation owned directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of voting securities of the Company) becomes
(other than solely by reason of a repurchase of voting securities by the
Company), the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of fifty percent (50%) or more of the combined
voting power of the Company's then total outstanding voting securities;
(b) the Company consolidates with or merges with
or into another corporation or partnership or conveys, transfers or leases, in
any transaction or series of transactions, all or substantially all of its
assets to any corporation or partnership, or any corporation or partnership
consolidates with or merges with or into the Company, in any event pursuant to
a transaction in which the outstanding voting stock of the Company is
reclassified or changed into or exchanged for cash, securities or other
property, other than any such transaction where (i) the outstanding voting
securities of the Company are changed
<PAGE> 2
into or exchanged for voting securities of the surviving corporation and (ii)
the persons who were the beneficial owners of the Company's voting securities
immediately prior to such transaction beneficially own immediately after such
transaction 50% or more of the total outstanding voting power of the surviving
corporation, or the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
2.5. Code means the Internal Revenue Code of 1986, and any
amendments thereto.
2.6. Committee means either (i) the Board or (ii) a
committee of the Board designated by the Board to administer the Plan and
composed of not less than two directors, each of whom is expected, but not
required, to be a "Non-Employee Director" (within the meaning of Rule 16b-3 of
the Exchange Act) and an "outside director" (within the meaning of Code section
162(m)) to the extent Rule 16b-3 of the Exchange Act and Code section 162(m),
respectively, are at such time applicable to the Company and the Plan. If at
any time such a committee has not been so designated, the Board shall
constitute the Committee.
2.7. Common Stock means the common stock, $0.01 par value,
of the Company.
2.8. Company means TeleBanc Financial Corporation, a
Delaware corporation.
2.9. Consultant means any person performing consulting or
advisory services for the Company or any Affiliate, with or without
compensation, to whom the Committee chooses to grant a Stock Award, Option, or
SAR in accordance with the Plan.
2.10. Corresponding SAR means an SAR that is granted in
relation to a particular Option and that can be exercised only upon the
surrender to the Company, unexercised, of that portion of the Option to which
the SAR relates.
2.11. Director means a member of the Company's Board of
Directors.
2.12. Disability shall have the meaning provided for in
Section 22(e)(3) of the Code or any successor statute thereto.
2.13. Exchange Act means the Securities Exchange Act of
1934, as amended.
2.14. Fair Market Value means, on any given date, the
current fair market value of the shares of Common Stock as determined pursuant
to subsection (a) or (b) below.
(a) While the Company is a Public Company, Fair
Market Value shall be determined as follows: (i) if the Common Stock is traded
on the Nasdaq SmallCap or National Market or listed on a national securities
exchange, the closing price of the Common Stock on the determination date on
the exchange on which the Common Stock is principally traded, or, if there are
no sales on such date, then on the next preceding date on which there were
sales of Common Stock, (ii) if the Common Stock is not traded on the Nasdaq
SmallCap or National Market or listed on a national securities exchange, the
closing price last reported by the National Association of Securities Dealers,
Inc. for the over-the-counter market on the determination date, or, if no sales
are reported on such date, then on the next preceding date on which there where
such quotations.
(b) Notwithstanding subsections (a) and (b) of
this Section, in all cases, Fair Market Value shall not be less than the par
value of the Common Stock.
(c) For purposes of this Section, the term
"Public Company" means the Company, subsequent to the effective date of the
Plan, has sold securities pursuant to an effective registration statement filed
pursuant to the Securities Act and is subject to the reporting and information
requirements under the Exchange Act, and the term "Non-Public Company" means
the Company has not sold securities pursuant to an effective registration
statement filed pursuant to the Securities Act and is not subject to the
reporting and information requirements under the Exchange Act.
2
<PAGE> 3
2.15. Initial Value means, with respect to an SAR, the Fair
Market Value of one share of Common Stock on the date of grant.
2.16. Incentive Stock Option means an Option qualifying for
special tax treatment under Section 422 of the Code.
2.17. Nonqualified Stock Option means an option which is
not an Incentive Stock Option.
2.18. Option means a stock option that is either a
Nonqualified Stock Option or Incentive Stock Option that entitles the holder to
purchase from the Company a stated number of shares of Common Stock at the
price set forth in an Agreement.
2.19. Optionee means the employee, Director or Consultant
to whom an Option is granted.
2.20. Parent Corporation means a corporation which is with
respect to the Company a parent corporation as defined in Section 424 of the
Code.
2.21. Participant means an employee of the Company or an
Affiliate, a Director or a Consultant who satisfies the requirements of Article
IV and is selected by the Committee to receive a Stock Award, Option, SAR or a
combination thereof.
2.22. Plan means this 1998 Stock Incentive Plan.
2.23. SAR means a stock appreciation right that in
accordance with the terms of an Agreement entitles the holder to receive, with
respect to each share of Common Stock encompassed by the exercise of such SAR,
the amount determined by the Committee and specified in an Agreement. In the
absence of such a determination, the holder shall be entitled to receive, with
respect to such share of Common Stock encompassed by the exercise of such SAR,
the excess of its Fair Market Value on the date of exercise over the Initial
Value. References to "SARs" include both Corresponding SARs and SARs granted
independently of Options, unless the context requires otherwise.
2.24. Securities Act means the Securities Act of 1933, as
amended.
2.24. Stock Award means Common Stock awarded to a
Participant under Article VIII.
2.25. Stockholder means the holder of Common Stock issued
under the Plan as a result of exercise of an Option or SAR or grant of a Stock
Award.
2.26. Subsidiary Corporation means a corporation which is
with respect to the Company a subsidiary corporation as defined in Section 424
of the Code.
2.27. Termination of Employment means unless provided
otherwise by the Committee, an employee has ceased to be employed by the
Company or an Affiliate, a director has ceased to be a member of the Board of
Directors of the Company or an Affiliate, or a Consultant has ceased to have a
consulting relationship with the Company or an Affiliate.
2.28. Ten Percent Shareholder means any individual owning
more than ten percent (10%) of the total combined voting power of all classes
of stock of the Company, a Parent Corporation or a Subsidiary Corporation. An
individual shall be considered to own any voting stock owned (directly or
indirectly) by or for his brothers, sisters, spouse, ancestors or lineal
descendants and shall be considered to own proportionately any voting stock
owned (directly or indirectly) by or for a company, partnership, estate or
trust of which such individual is a shareholder, partner or beneficiary, all as
required by Section 424(d) of the Code.
3
<PAGE> 4
ARTICLE III
ADMINISTRATION
The Committee shall have authority to grant Stock Awards, Options and SARs upon
such terms (not inconsistent with the provisions of this Plan) as the Committee
may consider appropriate. Such terms may include conditions (in addition to
those contained in this Plan) on the exercisability of all or any part of an
Option or SAR or on the transferability or forfeitability of a Stock Award.
Notwithstanding any such conditions, the Committee may, in its discretion,
accelerate the time at which any Option or SAR may be exercised, or the time at
which a Stock Award may become transferable or nonforfeitable or the time at
which it may be settled. The Committee shall have complete authority to
interpret all provisions of this Plan; to prescribe the form of Agreements; to
adopt, amend, and rescind rules and regulations pertaining to the
administration of the Plan; and to make all other determinations necessary or
advisable for the administration of this Plan. The express grant in the Plan
of any specific power to the Committee shall not be construed as limiting any
power or authority of the Committee; provided that the Committee may not
exercise any right or power reserved to the Board. Any decision made, or
action taken, by the Board or the Committee or in connection with the
administration of this Plan shall be final and conclusive on all persons having
an interest in the Plan. No member of the Board or the Committee shall be
liable for any act done in good faith with respect to this Plan or any
Agreement, Option, SAR or Stock Award. All expenses of administering this Plan
shall be borne by the Company. If no Committee is appointed by the Board, the
Board shall constitute the Committee.
The Committee, in its discretion, may delegate to one or more officers
of the Company, all or part of the Committee's authority and duties with
respect to grants and awards to individuals who are not subject to the
reporting and other provisions of Section 16 of the Exchange Act. The
Committee may revoke or amend the terms of a delegation at any time but such
action shall not invalidate any prior actions of the Committee's delegates that
were consistent with the terms of the Plan. Furthermore, the mere fact that a
Committee member shall fail to qualify as a "non-employee Director" or "outside
director" within the meaning of Rule 16b-3 under the Exchange Act and Section
162(m) of the Code, respectively, shall not invalidate any award made by the
Committee which award is otherwise validly made under the Plan.
ARTICLE IV
ELIGIBILITY
Any employee of the Company or an Affiliate (including a company that
becomes an Affiliate after the adoption of this Plan), a Director or a
Consultant to the Company or an Affiliate (including a company that becomes an
Affiliate after the adoption of this Plan) is eligible to participate in this
Plan if the Committee, in its sole discretion, determines that such person has
contributed significantly or can be expected to contribute significantly to the
profits or growth of the Company or an Affiliate. Only employees of the
Company, a Subsidiary Corporation or a Parent Corporation are eligible to
receive Incentive Stock Options.
ARTICLE V
STOCK SUBJECT TO PLAN
5.1. Maximum Shares for Delivery. The maximum number of
shares of Common Stock that may be delivered to Participants under the Plan
pursuant to Stock Awards and exercise of options or SARs shall be 500,000
shares; and (ii) any Common Stock that are represented by awards granted under
the
4
<PAGE> 5
Plan of the Company, which are forfeited, expired or are canceled without the
delivery of Common Stock or which result in the forfeiture of Common Stock back
to the Company.
5.2. The shares of Common Stock issued may be shares of
authorized but unissued Common Stock or shares of previously issued Common
Stock that have been reacquired by the Company. The maximum aggregate number
of shares that may be issued under this Plan shall be subject to adjustment as
provided in Article X.
5.3. Individual Limit. The maximum number of shares of
Common Stock with respect to which Options, SARs, and Stock Awards may be
granted to any one Participant during any one calendar year shall be 100,000.
5.4. Reallocation of Shares. If an Option is terminated,
in whole or in part, for any reason other than its exercise or the exercise of
a Corresponding SAR that is settled with Common Stock, the number of shares of
Common Stock allocated to the Option or portion thereof may be reallocated to
other Options, SARs and Stock Awards to be granted under this Plan. If an SAR
is terminated, in whole or in part, for any reason other than its exercise or
the exercise of a related Option, the number of shares of Common Stock
allocated to the SAR or portion thereof may be reallocated to other Options,
SARs and Stock Awards to be granted under this Plan.
ARTICLE VI
OPTIONS
6.1 Award. In accordance with the provisions of Article
IV, the Committee will designate each individual to whom an Option is to be
granted and will specify the number of shares of Common Stock covered by such
awards. The Option Agreement shall specify whether the Option is an Incentive
Stock Option or Nonqualified Stock Option, the vesting schedule applicable to
such Option and any other terms of such Option. An individual must be an
employee of the Company, a Subsidiary Corporation or a Parent Corporation to be
eligible to be granted an Incentive Stock Option.
6.2 Option Price. The exercise price per share for
Common Stock subject to an Option shall be determined by the Board on the date
of grant; provided, however, that the exercise price per share shall not be
less than one hundred percent 100% of the Fair Market Value of a share of
Common Stock on the date the Option is granted and the exercise price per share
of Common Stock for an Option that is an Incentive Stock Option shall not be
less than one hundred percent (100%) of the Fair Market Value on the date the
Option is granted. Notwithstanding the preceding sentence, the exercise price
per share of Common Stock subject to an Option that is an Incentive Stock
Option granted to an individual who is or is deemed to be a Ten Percent
Shareholder on the date such option is granted, shall not be less than one
hundred ten percent (110%) of the Fair Market Value on the date the Option is
granted.
6.3 Maximum Option Period. Unless provided otherwise in
this Agreement, the maximum period in which an Option may be exercised shall be
ten years, except that no Option that is an Incentive Stock Option shall be
exercisable after the expiration of ten years from the date such Option was
granted. In the case of an Incentive Stock Option that is granted to a
Participant who is or is deemed to be a Ten Percent Shareholder on the date of
grant, such Option shall not be exercisable after the expiration of five years
from the date of grant. The terms of any Option that is an Incentive Stock
Option may provide that it is exercisable for a period less than such maximum
period.
6.4 Maximum Value of Options which are Incentive Stock
Options. To the extent that the aggregate Fair Market Value of the Common
Stock with respect to which Incentive Stock Options granted to any person are
exercisable for the first time during any calendar year (under all stock option
plans of the Company, a subsidiary Corporation or Parent Corporation) exceeds
$100,000, the Options are not Incentive Stock Options. For purposes of this
section, the Fair Market Value of the Common Stock will be determined as of the
time the Incentive Stock Option with respect to the Common Stock is granted.
This paragraph will be applied by taking Incentive Stock Options into account
in the order in which they are granted.
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6.5 Nontransferability. Except as provided in Section
6.6, each Option granted under this Plan shall be nontransferable except by
will or by the laws of descent and distribution. In the event of any such
transfer, the Option and any Corresponding SAR that relates to such Option must
be transferred to the same person or persons or entity or entities. Except to
the extent an Option is transferred in accordance with Section 6.6, during the
lifetime of the Participant to whom the Option is granted, the Option may be
exercised only by the Participant. No right or interest of a Participant in
any Option shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
6.6 Transferable Options. Section 6.5 to the contrary
notwithstanding, if the Agreement so provides, an Option that is not an
Incentive Stock Option may be transferred by a Participant to the Participant's
children, grandchildren, spouse, one or more trusts for the benefit of such
family members or a partnership in which such family members are the only
partners; provided, however, that Participant may not receive any consideration
for the transfer. The holder of an Option transferred pursuant to this section
shall be bound by the same terms and conditions that governed the Option during
the period that it was held by the Participant. In the event of any such
transfer, the Option and any Corresponding SAR that relates to such Option must
be transferred to the same person or persons or entity or entities.
6.7 Vesting and Termination of Employment. Except as
provided in an Option Agreement, the following rules shall apply:
(a) Options will vest as provided in the Option
Agreement. [An Option will be fully vested upon the occurrence of a Change of
Control prior to the Participant's Termination of Employment.] An Option will
be exercisable only to the extent that it is vested on the date of exercise.
Vesting of an Option will cease on the date of the Optionee's Termination of
Employment and the Option will be exercisable only to the extent the Option is
vested on the date of Termination of Employment.
(b) If the Optionee's Termination of Employment
is for reason of death or Disability, the right to exercise the Option (to the
extent vested) will expire on the earlier of (i) one (1) year after the date of
the Optionee's Termination of Employment, or (ii) the expiration date under the
terms of the Agreement. Until the expiration date, the Optionee's heirs,
legatees or legal representative may exercise the Option, except to the extent
the Option was previously transferred pursuant to Section 6.6.
(c) If the Optionee's Termination of Employment is
by reason of the Optionee's retirement from service of the Company and its
Affiliates on or after the attainment of age sixty-two (62), the right to
exercise the Option (to the extent that it is vested) will expire on the earlier
of (i) three (3) years after the date of the Optionee's Termination of
Employment, or (ii) the expiration date under the terms of the Agreement.
(d) If the Optionee's Termination of Employment
is for any reason other than death, Disability or retirement, the right to
exercise the Option (to the extent that it is vested) will expire on the
earlier of (i) three (3) months after the date of the Optionee's Termination of
Employment, or (ii) the expiration date under the terms of the Agreement.
However, if the Option would then expire during the Pooling Period and the
Common Stock received upon the exercise of the Option would be subject to the
Pooling Period transfer restrictions, then the right to exercise the Option
will expire ten (10) calendar days after the end of the Pooling Period.
"Pooling Period" means the period in which property is subject to restrictions
on transfer in compliance with the "Pooling of Interests Accounting" rules set
forth in the Securities and Exchange Commission Accounting Series Releases 130
and 135. If Termination of Employment is for a reason other than the
Optionee's death, disability or retirement and the Option holder dies after his
or her Termination of Employment but before the right to exercise the Option
has expired, the right to exercise the Option shall expire on the earlier of
(i) one (1) year after the date of the Optionee's Termination of Employment, or
(ii) the date the Option expires under the terms of the Agreement, and, until
expiration, the Optionee's heirs, legatees or legal representative may exercise
the Option, except to the extent the Option was previously transferred pursuant
to Section 6.6.
6.7 Forfeiture for Cause. Notwithstanding any provision
of the Plan to the contrary, unless provided otherwise in an Option Agreement,
all unexercised Options granted to an Optionee whose
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Termination of Employment is for "cause" shall terminate and be forfeited by
the Optionee. A termination of Employment shall be for cause if it is by
reason of (i) conduct related to the Optionee's service to the Company or an
Affiliate for which either criminal or civil penalties against the Optionee may
be sought, (ii) material violation of Company policies, or (iii) disclosing or
misusing any confidential information or material concerning the Company or
Affiliate. An Optionee may be released from the forfeiture provisions of this
section if the Committee (or its duly appointed agent) determines in its sole
discretion that such action is in the best interests of the Company.
6.8. Exercise. The Option holder must provide written
notice to the Secretary of the Company of the exercise of Options and the
number of Options exercised. Subject to the provisions of this Plan and the
applicable Agreement, an Option may be exercised to the extent vested in whole
at any time or in part from time to time at such times and in compliance with
such requirements as the Committee shall determine. An Option granted under
this Plan may be exercised with respect to any number of whole shares less than
the full number for which the Option could be exercised. An Option may not be
exercised with respect to fractional shares of Common Stock. A partial
exercise of an Option shall not affect the right to exercise the Option from
time to time in accordance with this Plan and the applicable Agreement with
respect to the remaining shares subject to the Option. The exercise of an
Option shall result in the termination of any Corresponding SAR to the extent
of the number of shares with respect to which the Option is exercised.
6.9. Payment. Unless otherwise provided by the Agreement,
payment of the Option price shall be made in cash or a cash equivalent
acceptable to the Committee. Unless otherwise provided by the Agreement,
payment of all or part of the Option price may also be made by surrendering
shares of Common Stock to the Company that have been held for at least six (6)
months prior to the date of exercise. If Common Stock is used to pay all or
part of the Option price, the sum of the cash or cash equivalent and the Fair
Market Value (determined as of the day preceding the date of exercise) of the
shares surrendered must not be less than the Option price of the shares for
which the Option is being exercised. In accordance with such procedures as the
Committee may determine, the Committee may approve payment of the exercise
price by a broker-dealer or by the Option holder with cash advanced by the
broker-dealer if the exercise notice is accompanied by the Option holder's
written irrevocable instructions to deliver the Common Stock acquired upon
exercise of the Option to the broker-dealer.
Wherever in this Plan or any Agreement a Participant is permitted to pay the
exercise price of an Option or SAR or taxes relating to the exercise of an
Option or SAR by delivering Common Stock, the Participant may, subject to
procedures satisfactory to the Committee, satisfy such delivery requirement by
presenting proof of beneficial ownership of such Common Stock, in which case
the Company shall treat the Option or SAR as exercised without further payment
and shall withhold such number of Common Stock from the Common Stock acquired
by the exercise of the Option or SAR.
6.10. Stockholder Rights. No Participant shall have any
rights as a stockholder with respect to shares subject to his or her Option
until the date of exercise of such Option.
6.11. Stock Certificate Legends. The Company may require
that certificates evidencing shares of Common Stock purchased upon the exercise
of Incentive Stock Option issued under the Plan be endorsed with a legend in
substantially the following form:
The shares evidenced by this certificate may not be
sold or transferred prior to ________, 19__, in the
absence of a written statement from the Company to
the effect that the Company is aware of the facts of
such sale or transfer.
The blank contained in this legend shall be filled in with the date that is the
later of (i) one year and one day after the date of the exercise of such
Incentive Stock Option or (ii) two years and one day after the grant of such
Incentive Stock Option. Upon delivery to the Company, at its principal
executive office, of a written statement to the effect that such shares have
been sold or transferred prior to such date, the
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<PAGE> 8
Company does hereby agree to promptly deliver to the transfer agent for such
shares a written statement to the effect that the Company is aware of the fact
of such sale or transfer.
6.12. Disposition of Stock. A Participant shall notify the
Company of any sale or other disposition of Common Stock acquired pursuant to
an Incentive Stock Option if such sale or disposition occurs (i) within two
years of the grant of an Option or (ii) within one year of the issuance of the
Common Stock to the Participant. Such notice shall be in writing and directed
to the Secretary of the Company.
ARTICLE VII
SAR
7.1. Award. In accordance with the provisions of Article
IV, the Board will designate each individual to whom SARs are to be granted and
will specify the number of shares covered by such awards. In addition no
Participant may be granted Corresponding SARs (under all Incentive Stock Option
plans of the Company and its Affiliates) that are related to Incentive Stock
Options which are first exercisable in any calendar year for stock having an
aggregate Fair Market Value (determined as of the date the related Option is
granted) that exceeds $100,000.
7.2. Maximum SAR Period. The maximum period in which an
SAR may be exercised shall be determined by the Board on the date of grant,
except that no Corresponding SAR that is related to an Incentive Stock Option
shall be exercisable after the expiration of ten years from the date such
related Option was granted. In the case of a Corresponding SAR that is related
to an Incentive Stock Option granted to a Participant who is or is deemed to be
a Ten Percent Shareholder, such Corresponding SAR shall not be exercisable
after the expiration of five years from the date such related Option was
granted. The terms of any Corresponding SAR that is related to an Incentive
Stock Option may provide that it is exercisable for a period less than such
maximum period.
7.3. Nontransferability. Except as provided in Section
7.4, each SAR granted under this Plan shall be nontransferable except by will
or by the laws of descent and distribution. In the event of any such transfer,
a Corresponding SAR and the related Option must be transferred to the same
person or persons or entity or entities. During the lifetime of the
Participant to whom the SAR is granted, the SAR may be exercised only by the
Participant. No right or interest of a Participant in any SAR shall be liable
for, or subject to, any lien, obligation, or liability of such Participant.
7.4. Transferable SARs. Section 7.3 to the contrary
notwithstanding, if the Agreement so provides, a SAR may be transferred by a
Participant to the children, grandchildren, spouse, one or more trusts for the
benefit of such family members or a partnership in which such family members
are the only partners; provided, however, that a Participant may not receive
any consideration for the transfer. In the event of any such transfer, a
Corresponding SAR and the related Option must be transferred to the same person
or persons or entity or entities. The holder of an SAR transferred pursuant to
this section shall be bound by the same terms and conditions that governed the
SAR during the period that it was held by the Participant.
7.5. Exercise. Subject to the provisions of this Plan and
the applicable Agreement, an SAR may be exercised in whole at any time or in
part from time to time at such times and in compliance with such requirements
as the Committee shall determine; provided, however, that a Corresponding SAR
that is related to an Incentive Stock Option may be exercised only to the
extent that the related Option is exercisable and only when the Fair Market
Value exceeds the option price of the related Option. An SAR granted under
this Plan may be exercised with respect to any number of whole shares less than
the full number for which the SAR could be exercised. A partial exercise of an
SAR shall not affect the right to exercise the SAR from time to time in
accordance with this Plan and the applicable Agreement with respect to the
remaining shares subject to the SAR. The exercise of a Corresponding SAR shall
result in the termination of the related Option to the extent of the number of
shares with respect to which the SAR is exercised.
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7.6. Employee Status. If the terms of any SAR provide
that it may be exercised only during employment or within a specified period of
time after Termination of Employment, the Committee may decide to what extent
leaves of absence for governmental or military service, illness, temporary
disability or other reasons shall not be deemed interruptions of continuous
employment.
7.7. Settlement. At the Committee's discretion, the
amount payable as a result of the exercise of an SAR may be settled in cash,
Common Stock, or a combination of cash and Common Stock. No fractional shares
will be deliverable upon the exercise of an SAR but a cash payment will be made
in lieu thereof.
7.8. Shareholder Rights. No Participant shall, as a
result of receiving an SAR award, have any rights as a stockholder of the
Company or any Affiliate until the date that the SAR is exercised and then only
to the extent that the SAR is settled by the issuance of Common Stock.
ARTICLE VIII
STOCK AWARDS
8.1. Award. In accordance with the provisions of Article
IV, the Board will designate each individual to whom a Stock Award is to be
made and will specify the number of shares of Common Stock covered by such
awards.
8.2. Vesting. The Board, on the date of the award, may
prescribe that a Participant's rights in the Stock Award shall be forfeitable
or otherwise restricted for a period of time or subject to such conditions as
may be set forth in the Agreement.
8.3. Performance Objectives. In accordance with Section
8.2, the Board may prescribe that Stock Awards will become vested or
transferable or both based on objectives such as, but not limited to, the
Company's, an Affiliate's or an operating unit's return on equity, earnings per
share, total earnings, earnings growth, return on capital, return on assets, or
Fair Market Value. If the Board, on the date of award, prescribes that a Stock
Award shall become nonforfeitable and transferable only upon the attainment of
performance objectives, the shares subject to such Stock Award shall become
nonforfeitable and transferable only to the extent that the Committee
certifies that such objectives have been achieved.
8.4. Stock Legends and Related Matters.
(a) The Committee, on behalf of the Company, may
endorse such legend or legends upon the certificates representing the shares of
Common Stock, and may issue such "stop transfer" instructions as it determines
to be necessary or appropriate to (i) prevent a violation of, or to perfect an
exemption from, the registration requirements of the Securities Act, or (ii)
implement the provisions of any agreement between the Company or an Affiliate
and the Participant with respect to such shares.
(b) The Committee may require that a Participant,
as a condition to receipt of a particular award, execute and deliver to the
Company a written statement, in form satisfactory to the Committee, in which
the Participant represents and warrants that the shares are being acquired for
such person's own account, for investment only and not with a view to the
resale or distribution thereof. The Participant shall, at the request of the
Committee, be required to represent and warrant in writing that, to the extent
permitted by the terms of the award, any subsequent resale or distribution of
Shares by the Participant shall be made only pursuant to either (i) a
Registration Statement on an appropriate form under the Securities Act, which
Registration Statement has become effective and is current with regard to the
shares being sold, or (ii) a specific exemption from the registration
requirements of the Securities Act, but in claiming such exemption the
Participant shall, prior to any offer of sale or sale of such shares, obtain a
prior favorable written opinion of counsel, in form and substance satisfactory
to counsel for the Company, as to the application of such exemption thereto.
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The Committee may delay any award, issuance or delivery of shares of Common
Stock if it determines that listing, registration or qualification of the
shares or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the sale or
purchase of shares under the Plan, until such listing, registration,
qualification, consent or approval shall have been effected or obtained, or
otherwise provided for, free of any conditions not acceptable to the Committee.
8.5. Employee Status. In the event that the terms of any
Stock Award provide that shares may become transferable and nonforfeitable
thereunder only after completion of a specified period of employment, the
Committee may decide in each case to what extent leaves of absence for
governmental or military service, illness, temporary disability, or other
reasons shall not be deemed interruptions of continuous employment.
8.6. Nontransferability. Except as provided in Section
8.7, Stock Awards granted under this Plan shall be nontransferable except by
will or by the laws of descent and distribution. No right or interest of a
Participant in a Stock Award shall be liable for, or subject to, any lien,
obligation, or liability of such Participant.
8.7. Transferable Stock Awards. Section 8.6 to the
contrary notwithstanding if the Award so provides, a Stock Award may be
transferred by a Participant to the children, grandchildren, spouse, one or
more trusts for the benefit of such family members or a partnership in which
such family members are the only partners; provided, however, that Participant
may not receive any consideration for the transfer. The holder of a Stock
Award transferred pursuant to this section shall be bound by the same terms and
conditions that governed the Incentive Award during the period that it was held
by the Participant.
8.8. Stockholder Rights. Prior to their forfeiture (in
accordance with the applicable Agreement) and while the shares of Common Stock
granted pursuant to the Stock Award may be forfeited or are nontransferable, a
Participant will have all rights of a stockholder with respect to a Stock
Award, including the right to receive dividends and vote the shares; provided,
however, that during such period (i) a Participant may not sell, transfer,
pledge, exchange, hypothecate, or otherwise dispose of shares of Common Stock
granted pursuant to a Stock Award, (ii) the Company shall retain custody of the
certificates evidencing shares of Common Stock granted pursuant to a Stock
Award, and (iii) the Participant will deliver to the Company a stock power,
endorsed in blank, with respect to each Stock Award. The limitations set forth
in the preceding sentence shall not apply after the shares of Common Stock
granted under the Stock Award are transferable and are no longer forfeitable.
ARTICLE IX
CHANGE IN CAPITAL STRUCTURE
The existence of outstanding Options shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issuance of bonds, debentures, preferred or prior
preference stock ahead of or affecting the Common Stock or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of
all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares
or other capital readjustment, the payment of a stock dividend, or other
increase or reduction of the number of shares of the Common Stock outstanding,
without receiving compensation therefore in money, services or property, then
(i) the number, class, and per share price of shares of Common Stock subject to
outstanding Options, SARs and Stock Awards hereunder shall be appropriately
adjusted in such a manner as to entitle an Optionee to receive upon exercise of
an Option or an SAR or the receipt of a Stock Award, for the same aggregate
cash consideration, the same total number and class of shares as he would have
received had the Optionee exercised his or her Option or SAR or received his or
her Stock Award in full immediately prior to the
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event requiring the adjustment; and (ii) the number and class of shares then
reserved for issuance under the Plan shall be adjusted by substituting for the
total number and class of shares of Common Stock then reserved that number and
class of shares of Common Stock that would have been received by the owner of
an equal number of outstanding shares of each class of Common Stock as the
result of the event requiring the adjustment.
After a merger of one or more corporations into the Company or after a
consolidation of the Company and one or more corporations in which the Company
shall be the surviving company, each holder of an Option or an SAR shall, at no
additional cost, be entitled upon exercise of such Option or SAR to receive
(subject to any required action by stockholders) in lieu of the number and
class of shares as to which such Option or SAR shall then be so exercisable,
the number and class of shares of stock or other securities to which such
Option holder would have been entitled pursuant to the terms of the agreement
of merger or consolidation if, immediately prior to such merger or
consolidation, such Option holder had been the holder of record of the number
and class of shares of Common Stock equal to the number and class of shares as
to which such Option or SAR shall be so exercised.
If the Company is merged into or consolidated with another company
under circumstances where the Company is not the surviving company, or if the
Company is liquidated, or sells or otherwise disposes of substantially all of
its assets to another company while unexercised Options or SARs or unvested
Stock Awards remain outstanding under the Plan, unless provisions are made in
connection with such transaction for the continuance of the Plan and/or the
assumption or substitution of such Options or SARs with new options, stock
appreciation rights covering the stock of the successor company, or parent or
subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices, then all outstanding Options, SARs and Stock Awards shall be
vested as of the effective date of any such merger, consolidation, liquidation,
or sale (the "corporate event").
Except as previously expressly provided, neither the issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, for cash or property, or for labor or services either
upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, nor the increase or decrease
of the number of authorized shares of stock, nor the addition or deletion of
classes of stock, shall affect, and no adjustment by reason thereof shall be
made with respect to, the number, class or price of shares of Common Stock then
subject to outstanding Options.
Adjustment under the preceding provisions of this section will be made
by the Committee, whose determination as to what adjustments will be made and
the extent thereof will be final, binding, and conclusive. No fractional
interests will be issued under the Plan on account of any such adjustment. No
adjustment will be made in a manner that causes an Incentive Stock Option to
fail to continue to qualify as an Incentive Stock Option under the Code.
The Board may make Stock Awards and may grant Options and SARs in
substitution for performance shares, phantom shares, stock awards, stock
options, stock appreciation rights, or similar awards held by an individual who
becomes an employee of the Company or an Affiliate in connection with a
transaction described in this Article IX. Notwithstanding any provision of the
Plan (other than the limitation of Section 5.1), the terms of such substituted
Stock Awards or Option or SAR grants shall be as the Board, in its discretion,
determines is appropriate.
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ARTICLE X
COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES
No Option or SAR shall be exercisable, no Common Stock shall be
issued, no certificates for shares of Common Stock shall be delivered, and no
payment shall be made under this Plan except in compliance with all applicable
federal and state laws and regulations (including, without limitation,
withholding tax requirements), any listing agreement to which the Company is a
party, and the rules of all domestic stock exchanges on which the Company's
Common Stock may then be listed. The Company shall have the right to rely on
an opinion of its counsel as to such compliance. Any share certificate issued
to evidence Common Stock when a Stock Award is granted or for which an Option
or SAR is exercised may bear such legends and statements as the Committee may
deem advisable to assure compliance with federal and state laws and
regulations. No Option or SAR shall be exercisable, no Stock Award shall be
granted, no Common Stock shall be issued, no certificate for shares shall be
delivered, and no payment shall be made under this Plan until the Company has
obtained such consent or approval as the Committee may deem advisable from
regulatory bodies having jurisdiction over such matters.
ARTICLE XI
GENERAL PROVISIONS
11.1. Tax Withholding. Whenever the Company proposes or is
required to distribute Common Stock under the Plan, the Company may require the
recipient to remit to the Company an amount sufficient to satisfy any federal,
state and local tax withholding requirements prior to the delivery of any
certificate for such shares or, in the discretion of the Committee, the Company
may withhold from the Common Stock to be delivered shares sufficient to satisfy
all or a portion of such tax withholding requirements. Whenever under the Plan
payments are to be made in cash, such payments may be net of an amount
sufficient to satisfy any Federal, state and local tax withholding
requirements.
11.2. Employee Status. For purposes of determining the
applicability of Section 422 of the Code (relating to incentive stock options),
or in the event that the terms of any Option, SAR or Stock Award provide that
an option or SAR may be exercised only during employment or within a specified
period of time after Termination of Employment or that a Stock Award shall
become transferable and nonforfeitable only after completion of a specified
period of employment, the Committee may decide to what extent leaves of absence
for governmental or military service, illness, temporary disability, or other
reasons shall not be deemed interruptions of continuous employment.
11.3. Effect on Employment and Service. Neither the
adoption of this Plan, its operation, nor any documents describing or referring
to this Plan (or any part thereof) shall confer upon any individual any right
to continue in the employ or service of the Company or an Affiliate or in any
way affect any right and power of the Company or an Affiliate or in any way
affect any right and power of the Company or an Affiliate to terminate the
employment or service of any individual at any time with or without assigning a
reason therefor.
11.4. Holding Period. Notwithstanding anything to the
contrary in the Plan, Common Stock acquired through the exercise of an Option,
SAR or Stock Award granted to a Committee member may not be disposed of by such
member during the six-month period beginning on the date the Option, SAR or
Stock Award is granted to such Committee member.
11.5. Unfunded Plan. The Plan, insofar as it provides for
grants, shall be unfunded, and the Company shall not be required to segregate
any assets that may at any time be represented by grants under this Plan. Any
liability of the Company to any person with respect to any grant under this
Plan shall be based solely upon any contractual obligations that may be created
pursuant to this Plan. No such
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obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
11.6. Rules of Construction. Headings are given to the
articles and sections of this Plan solely as a convenience to facilitate
reference. The reference to any statute, regulation, or other provision of law
shall be construed to refer to any amendment to or successor of such provision
of law.
11.7. Choice of Law. The Plan and all Agreements entered
into under the Plan shall be interpreted under the laws of the State of
Delaware, without regard to its conflict of laws provisions.
ARTICLE XII
AMENDMENT
The Board may amend or terminate this Plan from time to time;
provided, however, that no amendment may become effective until shareholder
approval is obtained if the amendment increases the aggregate number of shares
of Common Stock that may be issued under the Plan. No amendment shall, without
a Participant's consent, adversely affect any rights of such Participant under
any outstanding Stock Award, Option or SAR outstanding at the time such
amendment is made.
ARTICLE XIII
EFFECTIVE DATE OF PLAN, DURATION OF PLAN
13.1 The Plan became effective as of May 27, 1998 upon
adoption by the Board, subject to approval within one (1) year by the holders of
a majority of the shares of Common Stock.
13.2 Unless previously terminated, the Plan will terminate
ten (10) years after the earlier of (i) the date the Plan is adopted by the
Board, or (ii) the date the Plan is approved by the shareholders, except that
Options, SARs and Stock Awards that are granted under the Plan prior to its
termination will continue to be administered under the terms of the Plan until
the Options terminate or are exercised.
Date: May 27, 1998 TELEBANC FINANCIAL CORPORATION
---------------------
By: /s/ Mitchell H. Caplan
------------------------------
Name: Mitchell H. Caplan
----------------------------
Title: Vice Chairman,
Chief Executive Officer
and President
--------------------------
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EXHIBIT 10.4
MET HOLDINGS CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
---------------------------
FIRST AMENDMENT
---------------------------
WHEREAS, Met Holdings Corporation (the "Company") maintains the Met
Holdings Corporation Employee Stock Ownership Plan (the "Plan"); and
WHEREAS, the Board deems it to be in the best interest of the Company,
its subsidiaries, and their employees to amend the Plan.
NOW, THEREFORE, pursuant to Section 16 of the Plan, the Plan is hereby
amended as follows, effective January 1, 1992, except that Paragraph 3 below
shall be effective January 1, 1994.
1. Section 1.41(b) of the Plan is amended in its entirety by
adding the following sentence immediately at the end thereof to provide as
follows:
For eligibility purposes, an Employee's eligibility
computation period will begin on the date the Employee
performs his first Hour of Service for the Company.
2. Section 2.1 of the Plan is amended by adding the following
sentence at the beginning of the second paragraph to provide as follows:
If an Employee terminates employment prior to meeting the
above-stated service requirement and is subsequently rehired,
the Employee shall be treated as a new Employee upon his date
of rehire, and his prior Service shall be disregarded for
eligibility purposes.
3. Effective January 1, 1994, Section 2.2 of the Plan is amended
in its entirety to provide as follows:
A Participant shall be entitled to share in any allocation of
the Company's contribution for a particular Plan Year if and
only if the Participant completes 500 Hours of Service and is
employed on the last day of the Plan Year.
4. Section 7.3 of the Plan is amended by adding the following
sentence immediately at the end of the second paragraph to provide as follows:
To the extent required under Treasury Regulation Section
1.401(a)-14(b) (3), a participant who elects to defer receipt
of benefits may not do so hereunder if the exercise of such
election will cause benefits payable under the Plan with
respect to the Participant in the event of his death to be
more than "incidental" within the meaning of paragraph
(b)(1)(i) of Section 1.401-1.
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5. Section 10.6 of the Plan is amended by revising its first and
second sentences to provide as follows:
As soon as practicable after a Participant terminates Service
for a reason other than retirement, Total Disability or death,
the Committee shall direct the Trustee to place the value of
the Participant's Account as of its most recent valuation in
one (1) or more segregated investment accounts Permitted under
the Plan in trust for the named Employee. If the vested
portion of the Participant's Account has not exceeded $3,500
in value as of any Valuation Date preceding the Participant's
termination of employment with the Company, the Participant
shall be paid the vested portion as soon as practicable
following his termination of employment, in cash (unless the
Participant elects to receive such payment in shares of
Qualifying Employer Securities) without regard to the
Participant's election related to the timing of such payments.
If the Participant, upon termination of Service for any reason
other than retirement, death, or Total Disability, does not
consent to the payment of the vested portion of the
Participant's Account, and if the value of such Account
exceeds $3,500 on the Valuation Date immediately following the
Employee's termination of Service (or as of any prior
Valuation Date), the vested portion of the Participant's
Account will be distributed in the calendar year in which the
Participant attains age 65, unless the Participant makes a
written election to receive such payment as soon as
practicable after his termination of employment.
6. The Plan is amended by adding Section 10. 11 to provide as
follows:
Eligible Rollover Distributions. This Section applies to
distributions made from the Plan to Distributee's on or after
January 1, 1993. Notwithstanding any provision of the Plan to
the contrary that would otherwise limit a Distributee's
election under this Section, a Distributee may elect at the
time and in the manner prescribed by the Plan Administrator,
to have any portion of an Eligible Rollover Distribution paid
directly to an Eligible Retirement Plan specified by the
Distributee in a Direct Rollover. For purposes of this
Section -- "Distributee" means the Employee or former
Employee, the Employee's or former Employee's surviving spouse
and the Employee's or former Employee's spouse or former
spouse who is the alternate payee under a Qualified Domestic
Relations order, as defined in Section 414 (p) of the Code,
are Distributees with regard to the interest of the spouse or
former spouse.
"Eligible Retirement Plan" means an individual retirement
account described in Section 408(a) of the Code, an individual
retirement annuity described in Section 408 (b) of the Code,
an annuity plan described in Section 403(a) of the Code, or a
qualified trust described in Section 401(a) of the Code that
accepts the Distributee's Eligible Rollover Distribution.
However, in the case of an Eligible Rollover Distribution to
the surviving spouse of a Participant, an Eligible Retirement
Plan is an individual retirement account or individual
retirement annuity.
"Direct Rollover" means a payment by the Plan to, the Eligible
Retirement Plan specified by the Distributee.
2
<PAGE> 3
"Eligible Rollover Distribution" means any distribution of all
or any portion of the balance to the credit of the
Distributee, except that an Eligible Rollover Distribution
does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the
Distributee or the joint lives (or joint life expectancies) of
the Distributee and the Distributee's designated Beneficiary,
or for a specified period of ten years or more; any
distribution to the extent such distribution is required under
Section 401(a)(9) of the Code; and the portion of any
distribution that is not includible in gross income
(determined without regard to the exclusion for net unrealized
appreciation with respect to Employer securities).
7. Section 11.2(d) of the Plan is amended by revising the
top-heavy vesting schedule to provide as follows:
<TABLE>
<CAPTION>
Years of Service Percent Vested
---------------- --------------
<S> <C>
Less than 1 year 0%
1 20%
2 40%
3 60%
4 80%
5 or more years 100%
</TABLE>
8. Section 7.4 of the Trust is amended by inserting the words
"not less often than annually" after the word "obtain" in the first sentence.
9. Nothing contained herein shall be held to alter, vary or
affect any of the terms, provisions, or conditions of the Plan or any agreement
entered into thereunder, other than as stated above.
MET HOLDINGS CORPORATION
By /s/ DAVID SMILOW
-----------------------------------
Its Chairman/Treasurer
----------------------------------
Date 2/25/94 Attest: EMIDIO MORIZO
-----------------
(Seal)
- ----------
3
<PAGE> 4
MET HOLDINGS CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
UNDER SECTIONS 401(a) AND 4975(e)(7) OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED
EFFECTIVE DATE: JANUARY 1, 1992
<PAGE> 5
ADOPTION
OF
MET HOLDINGS CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
The Board of Directors of Met Holdings Corporation (the "Company")
has, on December 23, 1992, adopted this Employee Stock Ownership Plan ("Plan")
as hereinafter stated in Part I and Part II of said Plan, attached hereto and
made a part hereof. The Plan, effective January 1, 1992, is designed to
qualify as a money purchase pension under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code") with respect to fixed
contributions made under Section 3. 1 (a) of the Plan, and as a stock bonus
plan under Section 401(a) of the Code with respect to any contributions made
under Section 3.1(b) of the Plan. The Plan is also designed to qualify as an
employee stock ownership plan under Section 4975(e)(7) of the Code.
IN WITNESS WHEREOF, the Company has caused this Plan to be adopted and
has accepted the duties and responsibilities of Plan Administrator pursuant to
the Employee Retirement Income Security Act ("ERISA") as of this 23rd day of
December, 1992.
MET HOLDINGS CORPORATION
By: /s/ DAVID SMILOW
-----------------------------------
Its President
ATTEST:
By: /s/ ELIZABETH FELIX
-----------------------------------
Its Secretary
<PAGE> 6
PART I
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION NUMBER PAGE
- -------------- ----
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3. Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Participants Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5. Allocation of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6. Allocation To Participant's Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7. Retirement and Distribution of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8. In Event Of Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9. In The Event Of Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10. In The Event Of Termination Of Employment Or Change In Status . . . . . . . . . . . . . . . . . . . . . . . 22
11. Top Heavy Rules and Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
12. Administration Of The Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
13. Management of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
14. Obligations Of The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
15. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
16. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
17. Suspension, Discontinuance and Plan Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
18. Inclusion Of Other Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
-i-
<PAGE> 7
SECTION 1
Definitions
The following words and phrases used herein have the following meanings, unless
a different meaning is plainly required by the context:
The masculine pronoun wherever used shall include the feminine pronoun
and the singular shall include the plural.
1.1 "Account" means the record of the Participant's interest in the Trust
Fund, maintained by the Committee pursuant to Section 5.
1.2 "Acquisition Loan" means an Exempt Loan (or other extension of credit)
used by the Trust to finance the acquisition of Qualifying Employer
Securities which loan may constitute an extension of credit to the
Trust from a party in interest.
1.3 "Adjustment Factor" means the cost of living adjustment factor
prescribed by the Secretary of the Treasury under Section 415(d) of
the Code for years beginning after December 31, 1988, as applied to
such items and in such manner as the Secretary shall provide.
1.4 "Affiliate" means any employer aggregated with the Company under
Section 414(b), (c), (m), or (o) of the Code.
1.5 "Anniversary Date" means the last day of the Plan Year.
1.6 [RESERVED FOR FUTURE USE]
1.7 "Beneficiary" means the person or person designated under Section 9 to
receive a Participant's interest in the Plan in the event of the
Participant's death before the Participant has received a distribution
of his entire interest in the Plan.
1.8 "Board of Directors" means the Board of Directors of the Company.
1.9 "Code" means the Internal Revenue Code of 1986, as amended, together
with regulations promulgated pursuant thereto.
1.10 "Committee" or "Administrative Committee" means the committee
appointed to manage and administer the Plan as provided in Section 12.
1.11 "Company" means Met Holdings, Inc., its successors and assigns.
1.12 "Compensation" means the amount of W-2 earnings paid to an Employee by
the Employer (plus any amounts withheld from the Employee under a
401(k) Plan or cafeteria plan sponsored by the Employer) within a Plan
Year. Only the first $200,000 (or such larger amount as determined by
regulations under Section 415(d) and 416 of the Code) of a
1
<PAGE> 8
Participant's annual compensation shall be treated as compensation for
purposes of the Plan. Company contributions for pensions, profit
sharing or insurance benefits are also excluded.
Notwithstanding the foregoing, for purposes of determining the
$200,000 Compensation limit for purposes of Section 1.10 in defining a
Key Employee, and for the purposes of determining minimum
contributions or benefits, should the Plan be Top-Heavy as provided in
Section 11, Compensation shall be defined as an Employee's W-2
earnings from the Company for the Plan Year.
In determining the Compensation of a Participant for purposes of this
limitation, the rules of Section 414(q)(6) of the Code shall apply,
except in applying such rules, the term "family" shall include only
the spouse of the Participant and any lineal descendants of the
Participant who have not attained age 19 before the close of the Plan
Year. If, as a result of the application of such rules the adjusted
$200,000 limitation is exceeded, then the limitation shall be prorated
among the affected individual in proportion to each such individual's
compensation as determined under this Section prior to the application
of this limitation.
1.13 "Effective Date" of the Plan means January 1, 1992 subject to the
condition subsequent that it be approved and qualified under the
Internal Revenue Code.
1.14 "Employee" means any person who (a) is in the employment of the
Employer, and (b) whose wages from the Employer are subject to
withholding for the purposes of Federal Income Taxes and the Federal
Insurance Contribution Act. "Employee" shall not include any person
who is paid by an Employer as an independent contractor.
1.15 "Employer" means the Company, Metropolitan Bank for Savings, F.S.B.,
and any other company which, with the Company's consent, adopts the
Plan and joins in the Trust Agreement.
1.16 "Entry Date" means the last day of the Plan Year. Additionally, the
Committee may, on a uniform and nondiscriminatory basis, at any time
and from time to time authorize a special entry date for eligible
participants, but prior to the next regularly scheduled Entry Date.
1.17 "ESOP" means an Employee Stock Ownership Plan as defined in Section
4975(e)(7) of the Code.
1.18 "Exempt Loan" means a loan made to the Plan which satisfies the
requirements of Section 2550.408b-3 of the Department of Labor
Regulations, Section 54.4975-7(b) of the Treasury Regulations, and the
Trust Agreement.
1.19 "Family Member" means an Employee who is the Employee's spouse, lineal
ascendant or descendant, or spouse of such lineal ascendant or
descendant, of an Employee who is a five percent owner of the Company,
or if not a five-percent owner is a Highly Compensated Employee as
defined in 1.43 of the Plan and is also in the group consisting
2
<PAGE> 9
of the ten (10) Highly Compensated Employees paid the greatest
Compensation during the Year.
1.20 "Financed Shares" means shares of Qualifying Employer Securities
acquired by the Trust with the proceeds of an Acquisition Loan,
whether or not pledged as collateral to secure the repayment of such
Acquisition Loan.
1.21 "Forfeiture" means that portion of a Participant's Account that is not
vested, and occurs on the earlier of (1) the Participant's termination
of employment with the Company and. the distribution of the entire
vested portion of a Participant's Account, or (2) the last day of the
Plan Year in which the Participant incurs five (5) consecutive
one-year Breaks in Service (as defined in Section 1.24(b) hereof).
1.22 "Highly Compensated Employee" means highly compensated active
employees and highly compensated former employees.
A highly compensated active employee includes any Employee who
performs service for the Company or an Affiliate during the
determination year and who, during the look-back year: (i) received
Compensation in excess of $75,000 (as adjusted pursuant to Section 415
(d) of the Code); (ii) received Compensation in excess of $50,000 (as
adjusted pursuant to Section 415 (d) of the Code) and was a member of
the top-paid group for such year; or (iii) was an officer of the
Company or an Affiliate and received Compensation during such year
that is greater than 50 percent of the dollar limitation in effect
under Section 415(b)(1)(A) of the Code.
The term highly compensated employee also includes: (i) an Employee
who is both described in the preceding sentence if the term
"determination year" is substituted for the term "look-back year" and
who is one of the 100 Employees who received the most Compensation
from the Company or an Affiliate during the determination year; and
(ii) employees who are 5 percent owners at any time during the
look-back year or determination year.
If no officer has satisfied the compensation requirement of (iii)
above during either a determination year or look-back year, the
highest paid officer for such year shall be treated as a Highly
Compensated Employee.
For this purpose, the determination year shall be the Plan Year. The
look-back year shall be the twelve-month period immediately preceding
the determination year.
A highly compensated former employee includes any employee who
separated from service (or was deemed to have separated) prior to the
determination year, performs no service for the Company during the
determination year, and was a highly compensated active employee for
either the separation year or any determination year ending on or
after the Employee's 55th birthday.
If an Employee is, during a determination year or look-back year, a
family member of either a 5 percent owner who is an active or former
Employee or a Highly Compensated
3
<PAGE> 10
Employee who is one of the 10 most highly compensated employees ranked
on the basis of Compensation paid by the Company or an Affiliate
during such year, then the family member and the 5 percent owner or
top-ten highly compensated employee shall be aggregated. In such
case, the family member and 5 percent owner or top-ten highly
compensated employee shall be treated as a single employee receiving
compensation and contributions equal to the sum of such compensation
and plan contributions of the family member and 5 percent owner or
top- ten highly compensated employee. For purposes of this section,
family member includes the spouse, lineal ascendants and descendants
of the Employee or former Employee and the spouses of such lineal
ascendants and descendants.
The determination of who is a Highly Compensated Employee, including
the determinations of the number and identity of Employees in the
top-paid group, the top 100 Employees, the number of Employees treated
as officers and the compensation that is considered, will be made in
accordance with section 414(q) of the Code and the regulations
thereunder.
1.23 "Late Retirement Date" means the Anniversary Date coinciding with or
next following a Participant's actual Retirement Date, after having
reached his Normal Retirement Date.
1.24 "Limitation Year" means the Plan Year.
1.25 "Loan Suspense Account" means an account in which Qualifying Employer
Securities are held and which has not been allocated to Participant's
Accounts because they were purchased with borrowed funds pursuant to
the provisions of Section 13.4 hereof or transferred to such account
pursuant to the terms hereof.
1.26 "Non Highly Compensated Employee" means an Employee who is neither a
Highly Compensated Employee nor a Family Member.
1.27 "Non-Key Employee" is an Employee who is not a Key Employee. Non-Key
Employees shall include Employees who are former Key Employees.
1.28 "Normal Retirement Age" means the date a Plan Participant, if still an
Employee, attains age 65.
1.29 "Normal Retirement Date" means the first day of the month coincident
with, or next following, the date upon which a Participant attains his
Normal Retirement Age.
1.30 "Other Investments Account" means the Account of a Participant which
reflects his interest in the Plan attributable to Trust assets other
than Qualifying Employer Securities.
1.31 "Participant" means an Employee who is included in the Plan as
provided in Section 2.1.
1.32 "Participant's Account" means a separate account, maintained in the
aggregate by the Committee, for each Participant with respect to his
total interest in the Plan and Trust.
4
<PAGE> 11
1.33 "Participant's Company Stock Account" means the Participant's Account,
credited with Qualifying Employer Securities.
1.34 "Plan" means the Met Holdings Corporation Employee Stock ownership
Plan as set forth herein.
1.35 "Plan Year" means the 12 month period ending on December 31 of each
year.
1.36 "Pregnancy or Child Care Leave of Absence" shall mean, with respect to
a Plan Year commencing on or after July 1, 1984, a compensated or
uncompensated leave of absence of fixed or indefinite duration granted
to an Employee by the Company or an Affiliate pursuant to a written
request which is submitted to the Company or Affiliate by the Employee
no later than thirty (30) days prior to the first day of the proposed
leave of absence that is sought (i) because of the pregnancy of the
Employee, (ii) because of the birth of a child of the Employee, (iii)
because of the placement of a child with the Employee in connection
with the adoption of such child by such Employee or for the purpose of
enabling the Employee to care for a child for a period beginning
immediately after the birth of such child to the Employee, or (iv)
because of A the placement of such child with the Employee, or (v)
because of an absence of not more than two (2) consecutive calendar
years in duration which, upon his return to the employ of an Company
or an Affiliate, the Employee demonstrates to the satisfaction of the
one Company to have been for one of the four aforementioned purposes.
1.37 "Qualified Domestic Relations Order" means a judgment, decree or order
(including an approval of a property settlement agreement) that
relates to the provision of child support and/or alimony payments or
marital property rights to a Spouse, former Spouse, child or other
dependent of a Participant, that is made pursuant to a domestic
relations law (including a community property law) of a State, that
creates or recognizes the right of an alternative payee, or assigns to
an alternative payee the right, to receive all or a portion of the
benefit payable to the Participant under the Plan, that sets forth the
specific information required by Section 414(p)(2) of the Code to be
included therein and that does not alter the amount or form of the
benefit otherwise payable to the Participant.
1.38 "Qualified Election Period" means the six Plan Year period beginning
with the Plan Year after the Plan Year in which the Participant first
becomes a Qualified Participant.
1.39 "Qualified Participant" means a Participant who has attained age 55
and who has completed at least 10 years of participation in the Plan.
1.40 "Qualifying Employer Securities" or "Company Stock" means the shares
of common stock of the Company as described in Section 4975 (e) (8) of
the Code (or of a corporation which is a member of a controlled group
with the Company) which is readily tradable on an established
securities market; or if not readily tradable, meets the following
criteria:
(a) is a common stock issued by the Company (or by a corporation
which is a member of the same controlled group) having a
combination of voting power and dividend
5
<PAGE> 12
rights equal to or in excess of that class of common stock
having the greatest voting power, and
(b) that class of common stock having the greatest dividend
rights.
Noncallable preferred stock shall be deemed to be "Qualifying Employer
Securities" if such stock is convertible at any time into stock which
constitutes "Qualifying Employer Securities" hereunder and if such
conversion is at a conversion price which (as of the date of the
acquisition by the Trust) is reasonable.
1.41 "Service" means any computation period during which an Employee was in
the employment of the Employer or an Affiliate including service
before the Effective Date of this Plan. It shall include any period
during which an Employee is on leave of absence authorized by his
Company. All leaves of absence shall be granted in a uniform and
nondiscriminatory manner to all Employees in similar circumstances.
(a) Any Participant who leaves the active Service of the Company
or an affiliated Company to enter the Armed Forces of the
United States of America during a period of national emergency
or compulsory military Service law of the United States of
America shall be deemed to be on leave of absence during the
period of his Service in such Armed Forces and during any
period after his discharge from such Armed Forces in which his
re-employment rights are guaranteed by law.
(b) For vesting purposes, a "Year of Service" shall be any Plan
Year in which the Employee completes 1,000 Hours of Service;
provided that no Employee shall be credited with Years of
Service for Service prior to 1992, for vesting purposes. For
eligibility purposes, an Employee's eligibility computation
period will begin on the date the Employee performs his first
Hour of Service for the Company.
(c) "Hour of Service" means each hour for which an Employee is
directly or indirectly paid or entitled to payment by the
Company for the performance of duties. These hours shall be
credited to the Employee for the computation period or periods
in which the duties are performed.
Each hour for which an Employee is paid, or entitled to
payment, by the Company on account of a period of time during
which no duties are performed (irrespective of whether the
employment relationship has terminated due to vacation,
holiday, illness, incapacity (including disability), layoff,
jury duty, military duty or leave of absence. No more than
501 Hours of Service shall be credited under this paragraph
for any single continuous period (whether or not such period
occurs in a single computation period). Hours under this
paragraph shall be calculated and credited pursuant to Section
2530.-200b-2 of the Department of Labor Regulations which are
incorporated herein by this reference.
Each hour for which back pay, irrespective of mitigation of
damage, has been either awarded or agreed to by the Company.
These hours shall be credited to the
6
<PAGE> 13
Employee for the computation period or periods to which the
award or agreement pertains rather than the computation period
in which the award, agreement, or payment was made.
For purposes of hours of Service credited for periods during
which no duties were performed, the method of determining the
number of hours to be credited and the method of crediting
such hours to commutation periods shall conform to the
requirements set forth in Sections 2530.200(b)-2(b) and (c) of
the Department of Labor Regulations.
The Company and its Affiliates. Hours of Service will also be
credited for any individual considered an Employee under
Section 414(n).
Solely for purposes of determining whether a Break in Service
for participation and vesting purposes has occurred in a
computation period, an individual who is absent from work for
maternity or paternity reasons shall receive credit for the
hours of Service which would otherwise have been credited to
such individual, but for such absence, or in any case in which
such hours cannot be determined, 8 hours of Service per day of
such absence. For purposes of this paragraph, an absence from
work for maternity or paternity reasons means an absence (1)
by reason of the Pregnancy of the individual, (2) by reason of
a birth of a child of the individual, (3) by reason of the
placement of a child with the individual in connection with
the adoption of such child by such individual, or (4) for
purposes of caring for such child for a period beginning
immediately following such birth or placement. The hours of
Service credited under this paragraph shall be credited (1) in
the computation period in which the absence begins if the
crediting is necessary to prevent a break in Service in that
period, or (2) in all other cases, in the following
computation period.
(d) "Benefit Accrual Computation Period" shall be defined as the
Plan Year.
(e) "Vesting Computation Period" shall be the Plan Year.
(f) "Break in Service" means any commutation period in which an
Employee works five hundred (500) Hours of Service or less.
Except as other-wise provided above, any year in which an
Employee works more than five hundred (500) Hours of Service,
but less than one thousand (1,000) Hours of Service shall not
be recognized as Service, but this shall not be a Break in
Service.
(g) In the event that an Employee who incurred a Break in Service
is subsequently re-employed, his Years of Service shall be
cumulative for vesting purposes, except that if the Employee,
at the time of his Break in Service, had no vested interest
and the number of consecutive one-year Breaks in Service
equals or exceeds the greater of five or the number of
pre-break Years of Service, Years of Service prior to such
Breaks in Service shall be disregarded. The same provision
shall apply in the case of an Employee whose Service has been
broken because he worked less
7
<PAGE> 14
than five-hundred (500) Hours of Service in a given Plan Year
when he resumes working at least one thousand (1,000) Hours of
Service per Plan Year.
1.42 "Spouse" means the lawful husband or wife of a Participant on the date
specified.
1.43 "Suspense Account" means the total forfeitable portion of all Former
Participants' Accounts which has not yet become a Forfeiture during
any Plan Year.
1.44 "Taxable Year" means, with respect to each Employer, the fiscal year
adopted by such company from time to time for Federal income tax
purposes.
1.45 "Total Disability" or "Disability" means a physical or mental
condition of a Participant resulting from bodily injury, disease, or
mental disorder which renders him incapable of continuing any gainful
occupation and which condition constitutes total disability under the
Federal Social Security Acts.
1.46 "Trust Agreement", means the trust agreement set forth in Part II of
this Plan.
1.47 "Trust Fund" means the fund described in Section 13, and maintained in
accordance with the terms of the Trust Agreement.
1.48 "Trustee(s)" means the person(s), or corporation(s), accepting the
appointment of Trustee(s) and acting as such, including any successor
Trustee(s), pursuant to the Trust Agreement.
1.49 "Valuation Date" means the last day of the Plan Year of the Trust
Fund. The fair market value of the assets in the Trust Fund as of any
valuation date shall be determined as the close of business an such
date, or, if such date is not a business day, as of the close of
business on the next preceding business day. On the Valuation Date
the Account balances are valued to determine if the plan is top-heavy.
The Valuation Date shall also be the Determination Date for Top-Heavy
Plan calculations.
SECTION 2
Eligibility
Eligibility Rules
2.1 Subject to Section 2.6 hereof, each Employee shall become a
Participant on the latter of the Effective Date. and the Entry Date
next following his completion of six-months of Service; provided that
anyone who is an Employee on December 31, 1992 shall become a
Participant as of the Effective Date.
If an Employee terminates employment prior to meeting the above-stated
service requirement and is subsequently rehired, the Employee shall be
treated as a new employee upon his date of rehire, and his prior
Service shall be disregarded for eligibility purposes. An Employee
meeting the above-stated service requirement, but who terminates
8
<PAGE> 15
employment prior to becoming a Participant, shall become a Participant
as of the date of rehire, if a Break in Service has not occurred prior
to such rehire. A rehired Employee who was a former Participant,
shall become a Participant upon his date of rehire.
2.2 Annual Allocations. A Participant shall be entitled to share in any
allocation of the Company's contribution for a particular Plan Year if
and only if the Participant completes 500 Hours of Service and is
employed on the last day of the Plan Year.
2.3 Annual Company Report to Committee. Within sixty (60) days. after the
last day of the Fiscal Year, the Company shall certify to the
Committee in writing such information from its records with respect to
Employees as the Committee may require in order to determine the
identity and interests of the Participants and otherwise to perform
its duties hereunder.
Any certification by the Company of information to the Committee
pursuant to this Plan shall, for all purposes of this Plan, be binding
on all parties in interest, provided that whenever any Employee proves
to the satisfaction of the Company that his period of Service or his
Compensation as so certified is incorrect, the Company shall correct
such certification. The Service of any Employee shall be determined
solely by reference to the data certified to the committee by the
Company.
The determination of the Committee as to the identity of the
respective Participants and as to their respective interests shall be
binding upon the Company, the Trustees, the Employees, the
Participants and all beneficiaries.
2.4 Transfers. Whenever any Participant is transferred from one Employer
who is a party to the Plan to another Employer who is a party to the
Plan, the Participant may continue on as a Participant in the Plan
without any interruption as if the Participant had at all times been
an Employee of the new Company; and in the event an affiliated company
ceases to be an Affiliate for any reason whatsoever, this event shall
not affect the continued participation in this Plan of any Participant
who becomes an Employee of the Company or any other Affiliate under
this Plan, and the Committee shall transfer the Participant's Account
from the account of the withdrawing Affiliate to the Company or new
Affiliate.
2.5 Breaks-in-Service. A Participant who terminates employment with an
Employer or suffers a Break-in-Service shall cease to be an active
Participant in this Plan and his Company contribution account shall be
placed on inactive status. Except as provided in Section 2.2, the
inactive Participant shall not share in the Company's contribution for
that Plan year, but his accounts shall continue to receive income
allocations. Thus, he shall remain a Participant until his account
balances have been distributed to him. Termination of employment may
have resulted from, voluntary or involuntary termination of
employment, unauthorized absence, or by failure to return to active
employment with the Company by the date on which an Authorized Leave
of Absence expired.
2.6 Excluded Employees. An Employee shall not participate in the Plan if
he is either (i) deemed under Section 414 (n) of the Code to be an
Employee of any Employer, or (ii) is included in a unit of Employees
covered by an agreement which the Secretary of Labor
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<PAGE> 16
finds to be a collective bargaining agreement between Employee
representatives and the Company or one or more Affiliates, including
the Company, if there is evidence that retirement benefits were the
subject of good faith bargaining between such Employee representatives
and the company or such Affiliates. For this purpose, "Employee
Representatives" will not include any organization more than half of
whose members are Employees who are owners, officers, or executives of
the Company or an Affiliate.
SECTION 3
Employer Contributions
3.1 (a) Money Purchase Pension Base Contribution. The Employer shall
contribute to the Plan for each Plan Year an amount equal to
ten percent (10%) of the aggregate Compensation of all
Participants eligible, under Section 2.2 hereof, to share in
allocations for the Plan Year.
(b) Stock Bonus Contributions. The Employer shall contribute to
the Plan for each Plan Year an amount sufficient to repay any
Acquisition Loan (to the extent such repayment is not effected
through contributions made under Section 3.1(a) hereof, and
the Board of Directors may determine annually by resolution to
make discretionary contributions to the Plan. In no event
shall the aggregate Employer Contributions for any Plan Year
exceed the maximum amount deductible under the applicable
provisions of Section 404 of the Code.
(c) The Committee shall maintain a separate Account for each
Participant, to which it shall credit the Participant's share
of all contributions in accordance with Section 5, and which
shall be revalued in accordance with Section 6.
(d) The fact that the Company or another Employer may make no
contribution hereunder for any Taxable Year shall not be
deemed to terminate the Plan or the Trust created hereunder.
3.2 Payment of Employer Contributions.
(a) The Employer's contributions for each Taxable Year shall be
paid directly to the Trustees. At the time of each such
payment, the Employer shall notify the Committee of the amount
of such contribution. The amount of each such contribution
shall be certified to be true and correct and in accordance
with the terms of the Plan by the Employer or by the
independent accounting firm regularly employed by the
employer, and such certification shall be final and conclusive
upon all persons interested in the Plan. No adjustment
affecting the Employer's net profit for any taxable year, made
subsequent to the payment of the Employer's contribution to
the Trustees and resulting from audit of the Employer's
Federal income tax return or otherwise, shall change the
amount of such contributions. The Company's contribution for
any Plan Year shall be paid in full as soon as practicable
after the close of such year, but not later than the time
prescribed by
10
<PAGE> 17
law for filing the Employer's Federal income tax return for
such year (including extensions thereof).
(b) Employer contributions will be paid in cash or Qualifying
Employer Securities as the Employer's Board of Directors may
from time to time determine. Shares of Qualifying Employer
Securities will be valued at their then fair market value.
However, to the extent that the Trust has current obligations,
including amounts necessary to provide sufficient cash to Pay
any currently maturing obligations under an Acquisition Loan,
the Employer contributions will be paid to the Trust in cash
subject to the discretion of the Employer's Board of
Directors. The Employer contribution will be paid to the
Trust on or before the date required to make such contribution
qualify as a deduction on the Employer's Federal income tax
return for the year.
(c) The Employer may make contributions to the Plan in whole or in
part in the form of Qualifying Employer Securities, provided
the Employer uses the fair market value of the securities as
of the date such contribution is made, as determined by an
independent appraiser, if required under Section 401 (a) (28)
(C) of the Code, engaged by the Committee. Such stock may be
obtained from its own reserve or treasury stock, or it may be
obtained from open market purchases.
3.3 Payment of Administrative Expenses. The Company intends to provide
all funds required for the administrative expenses of the Plan. Funds
not so provided by the Company may be paid first from any other
Employer, next from the Trust's earnings, and then from its principal.
3.4 Mistake in Fact. If, due to a mistake in fact, the Employer
contributions to the Trust for any Plan Year exceeds the amount to be
contributed by it, notwithstanding any provision to the contrary, the
Committee shall direct the Trustee, as soon as such a mistake in fact
is discovered, to either segregate such amount and return such amount
to the Employer within one year after the payment of the contribution
or apply it towards the contribution of the Company for the next Plan
Year(s).
3.5 Failure of Initial Plan Qualification. In the event that the
Commissioner of Internal Revenue determines that the Plan is not
initially qualified under the Code, any contribution made incident to
that initial qualification by the Employer shall be returned to the
Employer within one year after the date the initial qualification is
denied, but only if the application for the qualification is made by
the time prescribed by law for filing the Employer's return for the
taxable year in which the Plan is adopted, or such later date as the
Secretary of the Treasury may prescribe.
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<PAGE> 18
SECTION 4
Participants Contributions
4.1 No Employee Contributions. No Employee Contributions shall be
permitted under this Plan.
4.2 No Rollovers. The Trustee shall not accept "Rollover Contributions"
from any Participant.
SECTION 5
Allocation of Contributions
5.1 Allocations Generally. The Employer contribution, as determined under
Section 3.1, and Forfeitures for each Plan Year shall be allocated by
the Committee, as of the close of such Plan Year, between the Accounts
of all Participants entitled under Section 2.2 to share in the
allocation, as follows:
The Employer contribution and Forfeitures shall be allocated to each
such Participant's Account in proportion to the ratio which his
Compensation for the Plan Year bears to the total Compensation of all
such Participants eligible to share in Employer contributions for the
Plan Year.
5.2 Maximum Limitations on Allocations of Contributions. Compensation for
purposes of Sections 5. 2 and 5. 3 shall mean the Participant's wages,
salaries, fees for professional services and other amounts received
for personal service actually rendered for the Company maintaining the
Plan, earned income in the case of an Employee described in Section
401(c)(1) of the Code, earned income from sources outside the United
States (whether or not excludable or deductible) certain fringe
benefits described in Sections 104(a)(3), 105(a) and 105(h) of the
Code to the extent includible in gross income, amounts described in
Section 1065(d) of the Code, certain moving expense reimbursements to
the extent not deductible by the Participant, and the value of a
non-qualified stock option or the amount described in Section 83(b) of
the Code to the extent includible in gross income.
Compensation shall not include contributions to a qualified plan, or
to a SEP to the extent excludable by the Employee, nor amounts
distributed from a qualified plan of deferred compensation, nor
amounts realized from the exercise of a non-qualified stock option.
In addition, certain other amounts which receive special tax benefits
(such as premiums for group term life insurance not includible in the
gross income of the Employee) shall not be considered compensation.
Compensation for the purposes of this Section 5.2 and 5.3 for any Plan
Year which shall consist of less than 12 months shall be reduced
proportionately by that percentage that the Plan Year is reduced.
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<PAGE> 19
(a) Contributions and other additions to a Participant's Account
cannot exceed the lesser of $30,000 or 25% of Compensation.
Annual additions to a Participant's Account for purposes of
this limitation include in addition to the Company
contribution, any forfeitures allocated to Participant
Accounts, and the amount of a Participant's total voluntary
elective Contributions, plus any contributions to a similar
Company defined contribution plan, or any amounts described in
Sections 415 (1) (1) and 419 (a) (d) (2) of the Code. The
maximum amount of $30,000 shall be increased where allowed
under ERISA and Treasury regulations issued pursuant thereto,
to reflect 25% of the defined benefit dollar limitation set
forth in Section 415 (b) (1) of the Code as in effect for the
limitation year. In determining the above limitations, all
defined contribution plans of the Company shall be considered
as one plan.
(b) Should not more than one-third of the Company contributions
for a year which are deductible be allocated to Highly
Compensated Employees, the above annual addition limits shall
not include forfeitures of Qualifying Employer Securities if
such securities were acquired with the proceeds of an
Acquisition Loan or acquired with deductible Company
Contributions used to pay interest on such Acquisition Loan
and charged to such Participant's Account.
(c) If as a result of the allocation of forfeitures, a reasonable
error in estimating a Participant's annual compensation, or
under other limited facts and circumstances which the
Commissioner of the Internal Revenue Service finds justifiable
there should be an excessive annual addition for any
Participant's account, the excess shall be held in a suspense
account and allocated in the subsequent Plan Year pursuant to
the following:
(i) Any nondeductible voluntary Employee contributions,
to the extent they would reduce the excessive annual
addition, will be returned to the Participant;
(ii) If after the application of paragraph (a) an
excessive annual addition still exists, and the
Participant is covered by the Plan at the end of the
Limitation Year, the excessive annual addition in the
Participant's Account will be used to reduce Company
Contributions (including any allocation of
forfeitures) for such Participant in the next
Limitation Year, and each succeeding Limitation Year
if necessary.
(iii) If after the application of paragraph (a) an
excessive annual addition still exists, and the
Participant is not covered by the Plan at the end of
the Limitation Year, the excessive annual addition
will be held unallocated in a suspense account. The
suspense account will be applied to reduce future
Company Contributions (including allocation of any
forfeitures) for all remaining Participants in the
next Limitation Year, and each succeeding Limitation
Year if necessary;
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<PAGE> 20
(iv) If a suspense account is in existence at any time
during the Limitation year pursuant to this section,
it will not participate in the allocation of the
trust's investment gains and losses.
5.3 (a) Multiple Plan Reduction: If an Employee is a Participant is
one or more defined benefit plans and one or more defined
contribution plans maintained by the Company, the sum of the
defined benefit plan fraction and the defined contribution
plan fraction for any year may not exceed 1.0. The defined
benefit plan fraction for any year is a fraction (1) the
numerator of which is the projected "annual benefit" of the
Participant under the Plan (determined as of the close of the
Plan Year), and (b) the denominator of which is the lesser of:
(1) the product of 1.25 multiplied by the maximum dollar
limitation in effect under Section 415(b)(1)(A) of the Code
for such year, or (2) the product of 1.4 multiplied by the
amount which may be taken into account under Section
415(b)(1)(B) of the Code for such year.
The defined contribution plan fraction for any year is a fraction (a)
the numerator of which is the sum of the "annual additions" to the
Participant's Account as of the close of the Plan Year and (b) the
denominator of which is the sum of the lesser of the following amounts
determined for such year and each prior year of service with the
Company: (1) the product of 1.25 multiplied by the dollar limitation
in effect under Section 415(c)(1)(A) of the Code for such year
(determined without regard to Section 415(c)-(6) of the Code), or (2)
the product of 1.4 multiplied by the amount which may be taken into
account under Section 415(c)(1)(B) of the Code for such year.
(b) Top-Heavy Plans. Notwithstanding the foregoing, for any
Top-Heavy Plan Year, 1.0 shall be substituted for 1.25 unless
the extra minimum allocation pursuant to Section 11.5 is being
made. However, for any Plan Year in which this Plan is a
Super Top-Heavy Plan, 1.0 shall be substituted for 1.25 in any
event.
(i) Special Rule for Defined Contribution Fraction: At
the election of the Administrator, in applying the
provisions of Section 5.4 with respect to the defined
contribution plan fraction for any Plan Year ending
after December 31, 1982, the amount taken into
account for the denominator for each Participant for
all Plan Years ending before January 1, 1983 shall be
an amount equal to the product of (a) the amount of
the denominator determined under Section 5.2 for Plan
Years ending before January 1, 1982, multiplied by
(b) the "transition fraction".
For purposes of the preceding paragraph, the term
"transition fraction" shall mean a fraction (a) the
numerator of which is the lesser of (1) $51,875 or
(2) 1.4 multiplied by twenty-five percent (25%) of
the Participant's compensation for the Plan Year
ending in 1981, and (b) the denominator of which is
the lesser of (1) $41,500 or (2) twenty-five percent
(25%) of the Participant's compensation for the Plan
Year ending in 1981.
(ii) Excessive Benefit: If the sum of the defined benefit
plan fraction and the defined contribution plan
fraction shall exceed 1.0 in any year for any
14
<PAGE> 21
Participant in this Plan, the Company shall adjust
the numerator of the defined contribution plan
fraction so that the sum of both fractions shall not
exceed 1.0 in any year for such Participant.
(iii) Limitation Year: For purposes of determining "annual
additions", the limitation year shall be the Plan
Year.
(iv) In the case of a group of Company's which constitutes
either a controlled group of corporations, trades or
businesses under a common control (as defined in
Section 1563(a) or section 414 (b) or (c) as modified
by Section 415 (h) of the Code), or an affiliated
service group (as defined by Section 414(m) of the
Code) , all such Company's shall be considered as a
single Company for purposes of, applying the
limitation of Section 415 of the Code.
(v) Notwithstanding the foregoing or Section 5.2, the
annual addition for any Limitation Year beginning
before January 1, 1988 shall not be recomputed to
treat all Employee Contributions as an Annual
Addition.
SECTION 6
Allocation To Participant's Accounts
6.
6.1 General Rules.
(a) The Company Stock Account maintained for each Participant will
be credited annually with his allocable share of Qualifying
Employer Securities (including fractional shares) purchased
and paid for by the Trust or contributed in kind to the Trust.
Financed Shares shall initially be credited to a "Loan
Suspense Account" and shall be allocated to the Company Stock
Accounts of Participants only as payments on the Acquisition
Loan are made by the Trustee. The number of Financed Shares
to be released from the Loan Suspense Account for allocation
to Participant's Company Stock Accounts for each Plan Year
shall be determined by the Plan Committee in the Exempt Loan
documents under either method (1) or (2) below, as follows:
(i) General Method - The number of Financed Shares held
in the Loan Suspense Account immediately before the
release for the current Plan Year shall be multiplied
by a fraction. The numerator of the fraction shall
be the amount of principal and interest paid on the
Acquisition Loan for that Plan Year. The denominator
of the fraction shall be the sum of the numerator
plus the total payments of principal and interest on
that Acquisition Loan projected to be paid for all
future Plan Years. For this purpose, the interest
15
<PAGE> 22
to be paid in future years is to be computed by using
the interest rate in effect as of the current
allocation date.
(ii) Alternative Method - The Plan Committee may elect at
the time an Acquisition Loan is incurred (or the
provisions of the Acquisition Loan may provide) for
the release of Financed Shares from the Loan Suspense
Account based solely on the ratio that the payments
of principal for each Plan Year bear to the total
principal amount of the Acquisition Loan. This
method may be used only to the extent that: (a) the
Acquisition Loan provides for annual payments of
principal and interest at a cumulative rate that is
not less rapid at any time than level annual payments
of such amounts for ten years; (b) interest included
in any payment an the Acquisition Loan is disregarded
only to the extent that it would be determined to be
interest under standard loan amortization tables; and
(c) the entire duration of the Acquisition Loan
repayment period does not exceed ten years, even in
the event of a renewal, extension or refinancing of
the Acquisition Loan.
The Other Investments Account maintained for each
Participant will be credited (or debited) annually
with his share of any net income (or loss) of the
Trust, and with his share of Company Contributions in
cash. It will be debited for its proportionate share
of any cash payments made by the Trust for the
purchase of Qualifying Employer Securities or the
repayment of principal and interest on any
Acquisition Loan.
(b) The Trustee shall, as of each Valuation Date, adjust each
Participant's Company Stock Account and Other investments
Account for transactions since the date of the preceding
adjustment. Separate adjustments shall be made for each
Participant's Account as follows:
(i) The number of shares of Qualifying Employer
Securities in each Participant's Company Stock
Account shall be the number of shares as of the date
of the preceding adjustment, but increased by (A)
Qualifying Employer Securities allocated to it
pursuant to Section 5.1, (B) stock dividends on
Qualifying Employer Securities previously allocated
to said Account, and (C) Qualifying Employer
Securities acquired with funds from the corresponding
Other Investments Account, and shall be decreased by
distributions from said Account.
(ii) The fair market value of each Other Investments
Account shall be the fair market value of assets in
such Account as of the date of the preceding
adjustment, but increased by (A) money allocated to
it pursuant to Section 5.1, (B) dividends (other than
Qualifying Employer Securities' dividends) on
Qualifying Employer Securities previously allocated
to the corresponding Participant's Company Stock
Account, and (C) investment gains; and shall be
decreased by (i) distributions from said Account, (2)
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<PAGE> 23
amounts used to acquire Qualifying Employer
Securities for the corresponding Participant's
Company Stock Account, and (3) investment losses.
For the purposes of the foregoing paragraph, the
investment gain or loss in each Other Investments
Account since the last adjustment shall be its pro
rata share of the investment gain or loss of all
assets in the Other Investments Account based on the
change in fair market value of assets therein since
the last adjustment and computed in accordance with
uniform valuation procedures established by the
Trustee.
Shares of Qualifying Employer Securities held in the
Loan Suspense Account and dividends paid thereon,
funds borrowed for the purchase of Qualifying
Employer Securities, and interest and all other costs
attributable to the Loan Suspense Account shall be
excluded for all purposes under this Section, except
to the limited extent provided in Section 13.7(b).
6.2 Reports to Participants. As soon as practicable after each annual
Valuation Date, the Committee shall advise each Participant of the
amount then credited to his Account.
6.3 Diversification -- Elections. Each Qualified Participant shall be
permitted to direct the Plan as to the investment of twenty-five
percent (25%) of the value of the Participant's Account Balance
attributable to Qualifying Employer Securities. Such direction shall
be made within the Qualified Election Period and shall be made no
later than 90 days after the close of each Plan Year which occurs
within the Qualified Election Period. In the case of the last Plan
Year in which such direction may be made, the amount of permitted
investment shall be increased to fifty percent (50%) of the
Participant's Account.
6.4 Diversification -- Distributions. The portion of a Qualified
Participant's Account Balance with respect to which a diversification
election is made under Section 6.3 shall be distributed (without
regard to the distribution limitations of Section 409(d) of the Code)
to the Qualified Participant within 90 days after the last day of the
period during which the election may be made.
6.5 Diversification -- Required Consents. Notwithstanding the foregoing,
any election under this Section by a Qualified Participant which
results in a distribution to such Participant shall be subject to the
consent provisions of Section 9.4 and 10.5 of the Plan. If the
consent is not obtained, then amounts otherwise distributable under
this Section will remain in the Plan.
SECTION 7
Retirement and Distribution of Benefits
7.1 Vesting. At Normal Retirement Age, the Participant shall have a 100%
nonforfeitable interest in his account. If a Participant defers his
retirement beyond his Normal Retirement Date, he shall' continue as a
Participant until his actual retirement, but no
17
<PAGE> 24
distributions shall be made from his Accounts until his actual
retirement (other than distributions required under Section 7.6),
unless the Participant elects to withdraw all or cart of his. Company
Contribution Account pursuant to this Section.
7.2 Distribution -- Timing. If a Participant's employment terminates by
reason of his retirement pursuant to Section 7.1, the total balance of
his Account, as of the Valuation Date which coincides with or next
follows the date of his retirement, shall be distributed to him as
soon as practicable thereafter, in accordance with this Section 7.
7.3 Distribution -- Method. At such time that distributions are payable
under the Plan, the Participant's Company Stock Account and Other
Investment Account shall be distributed in such form as the
Administrator shall determine in its sole discretion; provided that
such discretion shall be exercised in a uniform and nondiscriminatory
manner.
Unless otherwise elected by a Participant, the distribution of his
account attributable to Qualifying Employer Securities as well as
other (diversified) investment shall commence not later than sixty
(60) days after the Anniversary Date coinciding with or next following
his Normal Retirement Age (or his termination of Service, if later).
However, if the amount of a Participant's account attributable to both
Qualifying Employer Securities as well as other (diversified)
investments cannot be ascertained by the Committee by the date on
which such distribution should commence, or if the Participant cannot
be located, distribution of his account shall commence within sixty
(60) days after the date on which his Company Stock Account Value can
be determined or after the date on which the Committee locates the
Participant. To the extent required under Treasury Regulation Section
1.401(a)-14(b)(3), a participant who elects to defer receipt of
benefits may not do so hereunder if the exercise of such election will
cause benefits payable under the Plan with respect to the Participant
in the event of his death to be more than "incidental" within the
meaning of paragraph (b)(1)(i) of Section 1.401-1.
In the event that Qualifying Employer Securities held in a
Participant's Account are subject to a "Put option" as provided under
Section 7.5(b) herein, distributions of the Qualifying Employer
Securities otherwise required under this Section shall not include any
Qualifying Employer Securities acquired with the proceeds of any
Acquisition Loan until the close of the Plan Year in which such loan
is repaid in full.
7.4 Distribution -- Form. Distribution of a Participant's Company Stock
Account will be made in the form of whole shares of Qualifying
Employer Securities (with cash paid in lieu of fractional shares),
cash, or a combination of both, as determined by the Administrator;
provided that the Participant shall have the right to elect to have
his distribution paid entirely in whole shares of Qualifying Employer
Securities (with cash paid in lieu of fractional shares). Any balance
in a Participant's Other Investments Account and any fractional shares
of Qualifying Employer Securities will be paid in cash. If Qualifying
Employer Securities are not available for purchase by the Trustee,
then the Trustee shall hold such balance until Qualifying Employer
Securities are acquired and then make such distribution. If the
Trustee is unable to purchase Qualifying Employer Securities required
for distribution, he shall make distribution in cash within one year
after the date the
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<PAGE> 25
distribution was to be made; except in the case of a retirement,
distribution shall be made within sixty (60) days after the close of
the Plan Year in which a Participant's retirement occurs.
Notwithstanding the foregoing, in the case of a Plan established and
maintained by a company, as described in Section 409 (h) (2) of the
Code, which is prohibited by law or the company's charter or bylaws
from redeeming or purchasing its own securities, Qualifying Employer
Securities will not be required to be distributed if the Participant
is permitted to receive a distribution in cash.
7.5 (a) Right of First Refusal. At the time of distributing shares of
Qualifying Employer Securities, the Committee may reserve to
the Company, the Plan, or both, a "right of first refusal " as
to such shares. The right of first refusal shall provide
that, prior to any subsequent transfer, such Qualifying
Employer Securities must first be offered in writing to the
Company, and then, if refused by the Company, to the Trust, at
the then fair market value. The Company and the Committee (on
behalf of the Trust) shall have a total of fourteen (14) days
(from the date the Participant or Beneficiary gives written
notice to the Company) to exercise the right of first refusal
on the same terms offered by a prospective buyer. A
Participant (or Beneficiary) entitled to a distribution of
Qualifying Employer Securities may be required to execute an
appropriate stock transfer agreement (evidencing the right of
first refusal) prior to receiving a certificate for such
Securities.
Notwithstanding the foregoing, a "right of first refusal"
shall not be permitted in the case of Qualifying Employer
Securities which are publicly traded on an established
securities market.
(b) Put Option. In the case of a distribution of Qualifying
Employer Securities which are not readily tradable on an
established securities market, the Plan shall provide the
Participant with a put option that complies with the
requirements of Section 409(h) of the Code.
The Company shall issue such a "put option" to each
Participant receiving a distribution of Qualifying Employer
Securities from the Trust subject to the availability of
retained earnings in such amount that complying with the "put
option" shall not be ultra-vires. The put option shall permit
the Participant to sell such Qualifying Employer Securities to
the Company, at any time during two option periods, at the
then fair market value as determined as of the most recent
valuation date (prior to the exercise of such right) by an
independent appraiser meeting requirements similar to the
requirements of the regulations prescribed under Sections
170(a)(1) and 401(a)(28)(C) of the Code engaged by the
Committee. The first out option period shall be a period of
sixty (60) days beginning on the date of distribution of
Qualifying Employer Securities to the Participant. The second
put option period shall be a period of sixty (60) days
beginning after the new determination of the fair market value
of such Qualifying Employer Securities by the Committee in the
next following Plan Year provided that if such determination
is made before the 13-month anniversary date of
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<PAGE> 26
distribution of Qualifying Employer Securities to the
Participant, then the second put option period shall be a
period of sixty (60) days beginning after the new
determination of the fair market value of such Qualifying
Employer Securities by the Committee in the next following
Plan Year.
The Trust shall have the option to assume the rights and
obligations of the Company at the time the Participant
requires the purchase by the Company. The Committee may be
permitted by the Company to direct the Trustee to purchase
Qualifying Employer Securities tendered to the Company under a
put option.
Such put option shall provide that if an Employee exercises
the put option, the Company (or the Plan if the Trustee so
elects), shall repurchase the Qualifying Employer Securities
by paying the fair market value of a Participant's Account
balance in cash, in five substantially equal annual payments.
The first installment shall be paid no later than 30 days
after the Participant exercises the put option. The payor
under the put option will pay a reasonable rate of interest
and provide adequate security on amounts not paid after 30
days.
(c) Placement of Restrictions on Stock Certificates. Shares of
Qualifying Employer Securities held or distributed by the
Trustee may include such legend restrictions on
transferability as a Company may reasonably require in order
to assure compliance with applicable Federal and State
securities law and with the provisions of this paragraph.
Except as otherwise provided in the Section, no shares of
Qualifying Employer Securities held or distributed by the
Trustee may be subject to a put, call or other option or
buy-sell similar arrangement. The provisions of this Section
shall continue to be applicable to shares of such Securities,
even if the Plan ceases to be an Employee stock ownership plan
under Section 4975(e)(7) of the Code.
7.6 Distribution -- Age 70 1/2 Rule. Notwithstanding anything to the
contrary, payment of a Participant's benefit will commence not later
than April 1 of the calendar year following the calendar year in which
the Participant attains age 70-1/2. Each Participant shall thereupon
receive his or her benefits in a lump sum in accordance with Section
7.3.
SECTION 8
In Event Of Disability
8.1 Vesting; Timing. In the event a Participant suffers a Total
Disability, the total balance of his Participant Account, as of the
Valuation Date which coincides with or next follows the determination
of disability, shall become 100% vested and distributed to him in a
lump sum as soon as administratively practicable after such Valuation
Date.
20
<PAGE> 27
SECTION 9
In The Event Of Death
9.1 Vesting; Timing. In the event of the death of a Participant prior to
the distribution of the total balance of his Participant Account, the
total balance of his Accounts, as of the Valuation Date which
coincides with or next follows the date of his death, shall be
immediately 100% vested and distributed in one lump sum to his primary
beneficiary or, if the primary beneficiary does not survive the
Participant, then to his secondary beneficiary, or if no beneficiary
has been designated or survives, then to the Participant's estate as
permitted under the provisions of Sections 7.3 and 7.4.
9.2 Beneficiary. At any time during his life, a Participant shall be
entitled to designate a beneficiary (including a secondary
beneficiary, if the Participant so desires), to whom in the event of
death the distribution provided herein shall be paid, by signing and
filing with the Committee a written designation of beneficiary in such
form as shall be required by the Committee. Any beneficiary so
designated may be changed by the Participant at any time or from time
to time during his life, by signing and filing with the Committee a
written notification of change of beneficiary in such form as shall be
required by the Committee. If the Participant is married, the
designated beneficiary shall be the Participant's spouse unless an
election was made under Section 9.4.
9.3 Beneficiary of Married Participants. In the event a married
Participant dies while still employed by the Company or before the
Participant's Account is paid to the Participant, the Participant's
Account must be paid to the Participant's surviving spouse in a lump
sum within five years. If a Participant dies and is not survived by a
spouse before distributions have commenced, the entire remaining
interest must be distributed to the Participant's beneficiary or
beneficiaries within five years.
9.4 Designation of Beneficiary. The designated beneficiary of all
benefits payable under this Plan shall be the Spouse of such
Participant on the date of death, unless a waiver to such designation
has been completed and received by the Committee in the form
acceptable to the Committee. The waiver must be in writing and must
be consented to by the Participant's spouse with such waiver
specifically acknowledging the non-spouse beneficiary or any
subsequent change in a non-spouse beneficiary. The spouse's consent
to a waiver must be witnessed by a plan representative or notary
public. Notwithstanding this consent requirement, if the Participant
establishes to the satisfaction of a plan representative that such
written consent may not be obtained because there is no spouse or the
spouse cannot be located, a waiver will be deemed a qualified
election. Any consent necessary under this provision will be valid
only with respect to the spouse who signs the consent. Additionally,
a revocation of a prior waiver may be made by a Participant without
the consent of the spouse at any time before the commencement of
benefits. The number of revocations shall not be limited.
9.5 Absence of Beneficiary Designation. If a Participant files no
designation of beneficiary or revokes a designation previously filed
without filing a new designation of beneficiary, or if
21
<PAGE> 28
all persons so designated as beneficiary shall predecease the
Participant or die prior to complete distribution, to them, the
Trustee, pursuant to Company instructions, shall distribute such death
benefit or balance thereof to the following who shall be deemed
beneficiaries: to such Participant's surviving spouse, or if none, to
such Participant's surviving issue per stirpes and not per capita, or
if none, to the Participant's estate.
SECTION 10
In The Event Of Termination Of Employment
Or Change In Status
10.1 General Rule. Subject to the provisions of Section 7.6 "Late
Retirement", there shall be no distributions made to a Participant
except on account of termination of employment, death, disability as
provided for in section 8, or termination of the Plan. All such
distributions shall be made in accordance with Sections 7.3 and 7.4,
except as specifically noted to the contrary herein.
10.2 Distribution -- Timing. If a Participant's employment terminates
otherwise than by his death, retirement or disability and the
Participant is not re-employed by the Company or an Affiliate at the
end of a period of five (5) consecutive one-year Breaks in Service,
distribution of such portion of the Participant's vested Account
Balance attributable to Qualifying Employer Securities will be made
not later than one year after the close of a period of five (5)
consecutive one-year Breaks in Service unless the Participant
otherwise elects under the provisions of this Plan. If the fair
market value of a Participant's Account attributable to Company
Securities is in excess of $500,000 (multiplied by the Adjustment
Factor as prescribed by the Secretary of the Treasury) as of the date
distribution is required to begin under this Section, distributions
shall be made in substantially equal annual payments over a period not
longer than five years plus an additional one year (up to an
additional five years) for each $100,000 increment, or fraction of
such increment, by which the value or the Participant's Account
exceeds $500,000, unless the Participant otherwise elects under the
provisions of the plan. In no event shall such distribution period
exceed the period permitted under Section 401(a) (9) of the Code. If
the fair market value of a Participant's Account attributable to
Qualifying Employer Securities is not in excess of $500,000
(multiplied by the Adjustment Factor as prescribed by the Secretary of
the Treasury) as of the date distribution is required to begin under
this Section, distributions shall be made in substantially equal
annual installments over a period not longer than five years, unless
the Participant otherwise elects under the provisions of the Plan.
If the Participant separates from service for a reason other than
those described above and is re-employed by the Company prior to the
end of a period of five (5) consecutive One Year Breaks in Service,
distribution to the Participant, prior to any subsequent termination
of service, shall be in accordance with terms of the Plan other than
this Section.
For purposes of this Section, in the event that Qualifying Employer
Securities held in a Participant's Account are subject to a "put
option" as provided under Section 7.5(b)
22
<PAGE> 29
herein, such Qualifying Employer Securities shall not include any
Qualifying Employer Securities acquired with the proceeds of an
Acquisition Loan until the close of the Plan Year in which such loan
is repaid in full.
10.3 Vesting. The non-forfeitable portion of the account balance of a
Participant's Account shall be a Percentage of such Account based upon
the number of Years of Service that such Participant has credited from
his date of employment after attainment of age 18 according to the
following schedule:
<TABLE>
<CAPTION>
Years of Service Percent Vested
---------------- --------------
<S> <C>
Less than 1 year 0%
1 20%
2 40%
3 60%
4 80%
5 or more years 100%
</TABLE>
10.4 Forfeitures. As of each Anniversary Date, any amounts which became
Forfeitures since the last Anniversary Date shall first be made
available to reinstate previously forfeited account balances of Former
Participants, if any, in accordance with Section 10.5. The remaining
Forfeitures, if any, shall be added to the Company's contribution made
pursuant to Section 5.1 and allocated among the Participant's Accounts
in the same manner as the Company's contribution for the current year.
In the event the allocation of Forfeitures provided herein shall cause
the "annual addition" (as defined in Section 5.2) to any Participant's
Account to exceed the amount allowable by the Code, the excess shall
be reallocated in accordance with Section 5.2(b). However, a
Participant who performs less than a Year of Service during any Plan
Year shall not share in Forfeitures for that year, unless required
pursuant to Section II.-3. If a portion of a Participant's Account is
forfeited, Company Stock allocated to the Participant's Company Stock
Account must be forfeited only after the Participant's Other
Investments Account has depleted. If interest in more than one class
of Company Stock has been allocated to a Participant's Account, the
Participant must be treated as forfeiting the same proportion of each
such class.
10.5 Restoration of a Participant's Account Upon Reemployment. If a former
Participant is reemployed by the Company before incurring five (5)
consecutive one-year Breaks-in-Service, and such Participant had
received a distribution of his entire vested interest in his Account
pursuant to Section 10.1 prior to being reemployed, the full amount in
such Participant's Company contribution account on the date of the
prior distribution (including vested and nonvested portions) will be
restored if:
(a) The Participant repays to the Plan the full amount of the
prior distribution, other than his voluntary contribution,
before the Participant incurs five (5) consecutive one-year
Breaks-in-Service commencing after such withdrawal; and
23
<PAGE> 30
(b) The Participant was not fully vested in his Company
contribution account at the time of the distribution.
10.6 Voluntary and Involuntary Cash-outs. As soon as practicable after a
Participant terminates Service for a reason other than retirement,
Total Disability or death, the Committee shall direct the Trustee to
place the value of the Participant's Account as of its most recent
valuation in one (1) or more segregated investment accounts permitted
under the Plan in trust for the named Employee. If the vested portion
of the Participant's Account has not exceeded $3,500 in value as of
any Valuation Date preceding the Participant's termination of
employment with the Company, the Participant shall be paid the vested
portion as soon as practicable following his termination of
employment, in cash (unless the Participant elects to receive such
payment in shares of Qualifying Employer Securities) without regard to
the Participant's election related to the timing of such payments. If
the Participant, upon termination of Service for any reason other than
retirement, death, or Total Disability, does not consent to the
payment of the vested portion of the Participant's Account, and if the
value of such Account exceeds $3,500 on the Valuation Date immediately
following the Employee's termination of Service (or as of any prior
Valuation Date), the vested portion of the Participant's Account will
be distributed in the calendar year in which the Participant attains
age 65, unless the Participant makes a written election to receive
such payment as son as practicable after his termination of
employment. The Account and all accumulated interest shall be paid to
the Employee at the time he attains his Normal Retirement Age. In the
event the Employee dies before reaching retirement age, the Account
balance shall be paid to any beneficiary the Employee has named in a
written designation filed with the Committee or, in the absence of
such designation, to the Employee's estate subject to the terms of
Section 9 of the Plan. The Trustee shall have no other
responsibilities with respect to such accounts except that, if the
balance of any such account shall approach the amount of federal
insurance, the Trustee shall split the account into two (2) or more
accounts.
10.7 Changes in Address. It shall be the responsibility of the terminating
Participant to keep the Committee informed as to his address, and the
Trustee and the committee shall not be required to do anything further
than sending all papers, notices, payments or the like to last address
given them by such Participant unless they can be shown to have acted
in bad faith, having had knowledge of the participant's actual
whereabouts.
10.8 Latest Time for Distribution. Except as limited by Sections 7, 8, 9
and 10, whenever the Trustee is to make a distribution or to commence
a series of payments on or before an Anniversary Date, the
distribution or series of payments may be made or begun on such date
or as soon thereafter as is practicable, but in no event later than
180 days after the Anniversary Date. Except, however, unless a Former
Participant elects in writing to defer the receipt of benefits (such
election may or may not result in a death benefit that is more than
incidental), the payment of benefits shall begin no later than the
60th day after the close of the Plan Year in which the latest of the
following events occurs:
(a) the date on which the Participant attains the earlier of age
65 or the Normal Retirement Date specified herein,
24
<PAGE> 31
(b) the 5th anniversary of the year in which the Participant
commenced participation in the Plan, or
(c) the date the Participant terminates his service with the
Company.
10.9 Age 70 1/2 Rule. Notwithstanding any provisions of the Plan, in no
event shall a distribution schedule or form of distribution exceed the
period permitted under Section 401(a)(9) of the Code or Treasury
Regulations Section 1.401(a)(9)-1 or Section 1.401(a)(9)-2.
10.10 Deemed Cash-outs if 0% Vesting. Notwithstanding anything to the
contrary, if the value of a Participant's vested portion of the
Participants Account is zero an the date of termination of employment,
then the Participant shall be deemed to have received a total
distribution of the vested portion of such Participant's Account on
such date.
10.11 Eligible Rollover Distributions. This Section applies to
distributions made from the Plan to Distributee's on or after January
1, 1993. Notwithstanding any provision of the Plan to the contrary
that would otherwise limit a Distributee's election under this
Section, a Distributee may elect at the time and in the manner
prescribed by the Plan Administrator, to have any portion of an
Eligible Rollover Distribution paid directly to an Eligible Retirement
Plan specified by the Distributee in a Direct Rollover. For purposes
of this Section --
"Distributee" means the Employee or former Employee, the Employee's or
former Employee's surviving spouse and the Employee's or former
Employee's spouses or former spouse who is the alternate payee under a
Qualified Domestic Relations Order, as defined in Section 414(p) of
the Code, are Distributees with regard to the interest of the spouse
or former spouse.
"Eligible Retirement Plan" means an individual retirement account
described in Section 408(a) of the Code, an individual retirement
annuity described in Section 408(b) of the Code, an annuity plan
described in Section 403(a) of the Code, or a qualified trust
described in Section 401(a) of the Code that accepts the Distributee's
Eligible Rollover Distribution. However, in the case of an Eligible
Rollover Distribution to the surviving spouse of a Participant, an
Eligible Retirement Plan is an individual retirement account or
individual retirement annuity.
"Direct Rollover" means a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee.
"Eligible Rollover Distribution" means any distribution of all or any
portion of the balance of the credit of the Distributee, except that
an Eligible Rollover Distribution does not include: any distribution
that is one of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy)
of the Distributee or the joint lives (or joint life expectancies) of
the Distributee's designated Beneficiary, or for a specified period of
ten years or more; any distribution to the extent such distribution
25
<PAGE> 32
is required under Section 401(a)(9) of the Code; and the portion of
any distribution that is not includible in gross income (determined
without regard to the exclusion for net unrealized appreciation with
respect to Employer securities).
SECTION 11
TOP-HEAVY DEFINITIONS AND RULES
11.1 Effective Date of Top-Heavy Provisions. If the Plan is or becomes
Top-Heavy in any Plan Year beginning after December 31, 1983, the
provisions of Section 11 will supersede any conflicting provision in
the Plan.
11.2 Top-Heavy Vesting Schedule. If the Plan is determined to be Top-Heavy
for any Plan Year, a Participant is vested percentage interest in his
Company contribution account shall be determined in accordance with the
Top-Heavy Vesting Schedule set forth in 11.2(d) of this Plan, subject
to the following additional requirements:
(a) Years of Service for purposes of vesting under a Top-Heavy
Vesting Schedule shall include Years of Service when the Plan
was not Top-Heavy;
(b) If any Participant in the Plan is not credited with an Hour of
Service after the Plan becomes Top- Heavy, that Participant
shall not be subject to the Top-Heavy Vesting Schedule, but
shall remain subject to the vesting schedule set forth in
Section 10.2 and the rules in effect prior to the date the
Plan becomes Top-Heavy;
(c) If the Plan ceases to be Top-Heavy, an Employee's vested
percentage interest in the contributions allocated to his
Company contribution account for Plan Years after the Plan
Year in which the Plan ceases to be Top-Heavy shall be
determined in accordance with the vesting schedule set forth
in Section 10.2 of the Plan, unless otherwise set forth in
Section 11.2 of this Plan;
(d) If the Plan is a Top-Heavy Plan in a Plan Year, a Participant
who is credited with an Hour of Service in such Plan Year
shall have the non-forfeitable interest in his Accrued Benefit
for such Plan Year determined in accordance with the following
schedule:
<TABLE>
<CAPTION>
Years of Service Percent Vested
---------------- --------------
<S> <C>
Less than 1 year 0%
1 20%
2 40%
3 60%
4 80%
5 or more years 100%
</TABLE>
26
<PAGE> 33
(e) Notwithstanding any provision to the contrary, the vested
benefit derived from Company contributions of a Participant
may not be reduced below what it was before the Plan ceased to
be Top-Heavy and the vesting schedule was changed. In
addition, each Participant with three (3) or more Years of
Service shall be given the option of remaining under the
Top-Heavy Vesting Schedule within the same period as set forth
in Section 16.3.
11.3 Minimum Contributions. If this Plan is Top-Heavy during any Plan
Year, the Company must make a minimum Contribution consisting of
Company contributions and forfeitures on behalf of each Plan
Participant who is a Non-Key Employee equal to an amount which is not
less than three (3%) percent of such Participant's Compensation. A
Minimum Contribution shall be made on behalf of such Participant even
though, under other Plan provisions, the Participant would not
otherwise be entitled to receive an allocation, or would have received
a lesser allocation for the Plan Year due to (i) the Participant's
failure to complete one thousand (1000) Hours of Service, or (ii) the
Participant's failure to make mandatory contributions to the Plan, if
required; or (iii) the Participant's Compensation is less than a stated
amount.
Notwithstanding the preceding paragraph, if the Company's Minimum
Contribution on behalf of each Plan Participant who is a Key Employee
equals an amount which is less than three (3%) percent of such
Participant's Compensation, then the Minimum Contribution required to
be made for each Non-Key Employee is limited to not more than the
highest contribution rate under the Plan for each Key Employee.
Therefore, if no Company Contribution is made an behalf of a Key
Employee, then no Minimum Contribution is required to be made on
behalf of each Non-Key Employee. However, if the Plan is included in
a Required Aggregation Group and it enables a defined benefit plan of
the Company to meet the requirements of Sections 401(a)(4) or 410 of
the Internal Revenue Code, then the minimum Contribution for Non-Key
Employees cannot be less than three (3) percent, regardless of the
contribution rate for Key Employees. For purposes of this
subparagraph, all defined contribution plans included in a Required
Aggregation Group shall be treated as one Plan.
A Minimum Contribution shall not be made on behalf of any Participant
who is not employed by the Company on the last day of the Plan Year.
For purposes of computing the Minimum Contribution for any Plan
Participant, amounts paid by the Company to Social Security shall be
disregarded. Also, for all Plan years, except those beginning before
January 1, 1985, any Company contribution attributable on behalf of
any Key Employee to a salary reduction or similar plan shall be taken
into account.
11.4 Minimum Contributions or Minimum Benefits in Two or More Plans. If
the Company maintains more than one qualified plan and more than one
such plan is determined to be Top-Heavy, a Minimum Contribution or a
Minimum Benefit, as described in the following paragraph, shall be
provided in one of such Plans. If the Company has both a Top-Heavy
defined benefit pension plan and a Top-Heavy defined contribution plan
and a Minimum Contribution is to be provided only in the defined
contribution plan, then this Contribution shall not be less than five
(5%) percent of a Participant's Compensation. Notwithstanding
27
<PAGE> 34
that set forth in Section 3.1, if the Minimum Contribution is to be
provided in this Plan, then the Company must provide such Minimum
Contribution even if the Company has no current or accumulated profits
for the Plan Year.
If a defined benefit plan of the Company is Top-Heavy during any Plan
Year, each Plan Participant who is a Non-Key Employee and who has
completed 1000 Hours of Service in the Plan Year must accrue a Minimum
Benefit derived from Company contributions which, at any time, when
expressed as an Annual Retirement Benefit equals or exceeds the
product of such Non-Key Employee's average annual Compensation for his
Testing Period under such defined benefit plan and the applicable
percentage which is the lesser of two (2%) percent multiplied by the
number of Years of Service with the Company or twenty (20%) percent.
In addition, the following rules shall also apply:
(a) Such Non-Key Employee must accrue a Minimum Benefit even if
such Employee is not employed by the Company on the last day
of the Plan Year, or if, under other Plan provisions, the
Participant would not otherwise be entitled to receive an
accrual or would have received a lesser accrual for the Plan
Year due to (i) the Participant's failure to make mandatory
contributions to the Plan, if required, or (ii) the
Participant's Compensation is less than a stated amount; or
(iii) the Plan is integrated with Social Security.
(b) A Year of Service shall not be taken into account in
determining the Minimum Benefit if such Year of Service either
ends in a Plan Year beginning before January 1, 1984 or if the
Plan was not Top-Heavy for any Plan Year ending during such
Year of Service.
(c) Compensation of the Employee in years ending in a Plan Year
beginning before January 1, 1984 or beginning after the close
of the last Plan Year in which the Plan is Top-Heavy shall be
disregarded.
(d) For purposes of computing the Minimum Benefit for any Non-Key
Employee, Company contributions to Social Security or
attributable to a salary reduction or similar plan shall not
be taken into account. Notwithstanding the preceding
sentence, any Company contribution attributable to a salary
reduction or similar plan shall be taken into account for
computing the Minimum Benefit for any Non-Key Employee for
Plan Years beginning before January 1, 1985.
(e) If the Non-Key Employee receives a benefit in a form other
than a single life annuity or a benefit other than at Normal
Retirement Age, the Minimum Benefit must be an amount that is
the actuarial equivalent of the minimum single life annuity
benefit commencing at Normal Retirement Age under such defined
benefit plan.
(f) All accruals derived from Company contributions, whether or
not attributable to years during which the Plan was Top-Heavy,
may be used in determining whether
28
<PAGE> 35
the Minimum Benefit accrual requirements described in this
paragraph are satisfied.
11.5 Aggregate Limit on Contributions and Benefits for Key Employees. If
any Participant is a Key Employee and is, or was, covered under both a
defined benefit plan and a defined contribution plan which are both
included in a Top-Heavy Group of the Company, then for any Plan Year
in which the Plans are Top-Heavy, the number "1.0" shall be for
substituted for "1.25" in each place where it appears in Section 5.4,
unless the Additional Minimum Contribution is being made pursuant to
this Section 11.5.
Notwithstanding the above paragraph, if the Plan is Top-Heavy, but is
not Super Top-Heavy, Section 5.3 without modification, shall continue
to govern the overall limitations on contributions and benefits for
Key Employees if an Additional Minimum Benefit or an Additional
Minimum Contribution equal to seven and one-half (7-1/2%) percent
shall be received by each Participant who is a Non-Key Employee in any
one qualified plan maintained by the Company. However, for any Plan
Year in which this Plan is a Super Top-Heavy Plan, 1.0 shall be
substituted for 1.25 in any event, where it appears in Section 5.3.
11.6 Miscellaneous Compensation Provisions. For any Plan Year in which a
Plan is Top-Heavy, the annual Compensation of each Participant which
may be taken into account for the purpose of determining Company
contributions or benefits under the Plan, including the computation of
the contribution rate for Key Employees in Section 11.3, shall not
exceed $200,000, or such larger amount as may be determined by the
Secretary of the Treasury in accordance with Section 416(d) of the
Internal Revenue Code and the regulations promulgated thereunder, for
Plan Years ending on or after January 1, 1988. Notwithstanding this
limitation, benefits attributable to annual Compensation while the
Plan was not Top-Heavy shall not be reduced.
11.7 Top-Heavy Definitions
11.7.1 "Additional Minimum Benefit" means the Minimum Benefit
described in Section 11.4; however, in determining the
applicable percentage in Section 11.4, "three (3%) percent"
shall be substituted for "two (2%) percent" and "twenty (20%)
percent" shall be increased by 1 percentage point for each
year for which the Plan is Top-Heavy, up to a maximum of
thirty (30%) percent.
11.7.2 "Additional Minimum Contribution" means the Minimum
Contribution described in Section 11.3; however, in
determining the Minimum Contribution "four (4%) percent" shall
be substituted for "three (3%) percent" wherever it appears
throughout Section 11.3.
11.7.3 "Aggregation Group" shall mean one of the following:
(a) Required Aggregation Group:
29
<PAGE> 36
"Required Aggregation Group" means each Plan of the Company or
an Affiliate, including terminated plans, in which a Key
Employee is a Participant and each other Plan of the Company
which enables any Plan in which a Key Employee is a
Participant to meet the requirements of Sections 410 or
401(a)(4) of the Code. Collectively-bargained plans that
include a Key Employee of an Company shall be included in the
Required Aggregation Group of the Company; or
(b) Permissive Aggregation Group:
"Permissive Aggregation Group" means each Plan in the Required
Aggregation Group and any Plan the Company elects to place
into the Aggregation Group, if this expanded group continues
to satisfy the requirements of Sections 401(a)(4) and 410 of
the Internal Revenue Code.
11.7.4 "Annual Retirement Benefit" means a benefit payable annually
in the form of a single life annuity with no ancillary
benefits and beginning at the Normal Retirement Age under the
Plan.
11.7.5 "Compensation" under Section 11 shall mean all W-2 earnings of
the Employee, from the Company for the Plan Year.
11.7.6 "Determination Date" for any Plan Year shall mean either (i)
the last day of the preceding Plan Year, or (ii) in the case
of the first Plan Year of any Plan, the last day of such Plan
Year.
11.7.7 "Key Employee" shall mean any Employee, former Employee, or
the Beneficiary of such Employee, who at any time during the
current Plan Year or during any of the four preceding Plan
Years, is described in one or more of the following three
categories:
(a) An Officer of the Company who receives from such Company an
annual Compensation which exceeds one hundred and fifty (150%)
percent of Thirty Thousand ($30,000.00) Dollars, or the
maximum dollar limitation under Section 415(c)(1)(A) of the
Code, as in effect for the calendar year in which the
Determination Date falls. The maximum number of Employees
required to be treated as Key Employees for the Plan Year by
reason of being Officers is the greater of 3 Employees or ten
(10%) percent of the number of Employees of the Company, but
such number shall not exceed 50 Employees. If the number of
Employees who are Officers of the Company exceed the maximum
number required to be counted as Key Employees, the Officers
to be considered as Key Employees are those with the highest
annual Compensation from the Company.
(b) One of the Employees owning or considered as owning within the
meaning of Section 318 of the Internal Revenue Code, as
modified by Section 416(i)(1)(B)(iii) of the Code, the largest
interests in the Company, unless such Employee receives
Compensation from the Company which is less than $30,000 per
year, or the
30
<PAGE> 37
maximum dollar limitation under Section 415(c)(1)(A) of the
Code, as in effect for the calendar year in which the
Determination Date falls. An Employee who has some ownership
interest in the Company is considered to be one of the top ten
owners unless at least ten (10) other Employees own a greater
interest than such Employee. If more than one Employee has
the same interest in the Company, the Employee having the
greater annual Compensation from the Company shall be treated
as having a larger interest in the Company.
(c) A Percentage Owner of the Company. A "percentage owner" means
any person who owns, or is considered as owning within the
meaning of Section 318, as modified by Section
416(i)(1)(B)(iii) of the Internal Revenue Code, either
(1) more than five (5%) percent of the outstanding stock
of the Company or stock possessing more than five
(5%) percent of the total combined voting power of
all stock of the Company; or
(2) more than one (1%) percent of the outstanding stock
of the Company or stock possessing more than one (1%)
percent of the total combined voting power of all
stock of the Company, if such person has an annual
compensation from the Company of more than $150,000.
If a person is considered during a Plan Year to be a Key
Employee under two or more categories, due to his status other
than as a Beneficiary, the present value of his accrued
benefit or the sum of his account balance is counted only once
during the Plan Year in testing whether the Plan is Top-Heavy.
If a person is considered during the Plan Year to be a Key
Employee because the person is both a Beneficiary and owner of
the Company, then the present value of the person's inherited
account balance and the present value of the person's accrued
benefit or the sum of his account balance as an Employee or
owner will be counted as the total accrued benefit or account
balance of the individual as a Key Employee in determining
whether the Plan is Top-Heavy. The determination of an
individual's status as a Key Employee is based on the Plan
Year containing the Determination Date.
11.7.8 "Minimum Benefit" means the benefit described in Section 11.4.
11.7.9 "Minimum Contribution" means the contribution described in
Section 11.3.
11.7.10 "Non-Key Employee" shall mean an Employee who is not a Key
Employee or is the Beneficiary of such Employee.
11.7.11 "Rollover Contributions and Similar Transfers" shall mean the
following:
(a) Related rollover contributions or similar transfers are those
(i) not initiated by the Employee;
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(ii) made on or before December 31, 1983; or
(iii) made to a plan maintained by the same Company, such
as in a merger or consolidation of two or more plans
or the division of a single plan into two or more
plans.
(b) Unrelated rollover contributions or similar transfers are
those which are both
(i) initiated by the Employee; and
(ii) made after December 31, 1983; and
(iii) made from a plan maintained by one Company to a plan
maintained by another Company.
11.7.12 "Super Top-Heavy" shall mean a Plan which would be Top-Heavy
if "ninety (90%) percent" were substituted for "sixty (60%)
percent" in each place it appears in Section 11.7-16.
11.7.13 "Top-Heavy" means a qualified Plan which is a Top-Heavy Plan
pursuant to the provisions of Section 11.7.16.
11.7.14 "Top-Heavy Group" means an Aggregation Group in which, as of
the Determination Date, the sum of the present value of the
accumulated accrued benefits for Participants who are Key
Employees under all defined benefit plans included in such
Aggregation Group and the sum of the account balances for
Participants, who are Key Employees under all defined
contribution plans included in such Aggregation Group exceeds
sixty (60%) percent of a similar sum determined for all
Employees, including their Beneficiaries, who are
participating under all Plans included in the Aggregation
Group.
11.7.15 "Top-Heavy Vesting Schedule" shall mean the vesting schedule
set forth in Section 11.2(d).
11.7.16 "Top-Heavy Plan" means a Plan for a Plan Year in which, as of
the Determination Date:
(a) The sum of the account balances of Participants in the Plan
who are Key Employees for the Plan Year exceeds sixty (60%)
percent of the sum of the account balances under the Plan for
all Employees, including their Beneficiaries participating
under the Plan, and this Plan is not part of any Aggregation
Group; or
(b) The Plan is part of a Top-Heavy Group and is included in the
Required Aggregation Group. Notwithstanding the preceding
sentence, collectively-bargained plans are not subject to the
rules of Section 11. December 31, 1983 shall not be taken
into account under the Plan for purposes of computing the Top-
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Heavy status of the Plan or group of Plans, except to the
extent provided in regulations.
11.7.17 Determination of Top-Heavy Status. In making the
determination of the Top-Heavy status of a Plan or group of
Plans, the accrued benefits or account balances derived from
Company and Employee contributions are taken into account, but
accumulated deductible Employee contributions are disregarded.
Also, the determination of the present value of the
accumulated accrued benefits and the account balances of a Key
Employee or Non-Key Employee participating in the plans
includes such amounts distributed to the Employee or to the
Beneficiary of such Employee during the Plan Year that
includes the Determination Date and the preceding four Plan
Years, even if such distribution occurred before the effective
date of Section 416 of the Code. The preceding amount also
includes distributions under a plan which has been terminated
which, if it had not been terminated, would have been included
in a Required Aggregation Group. An Unrelated rollover
contribution or similar transfer accepted by the Plan after
December 31, 1983 shall not be taken into account under the
Plan for purposes of computing the Top-Heavy status of the
Plan or group of Plans, except to the extent provided in
regulations.
If any individual ceases to be a Key Employee with respect to any Plan
for any Plan Year, but such individual was a Key Employee with respect
to such Plan for any prior Plan Year, any accrued benefit or account
balance of such Employee shall not be taken into account in
determining whether the Plan or group of Plans is Top-Heavy for any
Plan Year following the last Plan Year in which such Employee was
treated as a Key Employee. For Plan Years beginning after December
31, 1984, if any individual has not performed any service during the
Plan Year that includes the Determination Date and the preceding four
Plan Years for the Company, other than benefits under this Plan, then
any accrued benefit or account balance of such individual shall not be
taken into account in determining whether the Plan or group of Plans
is Top-Heavy for the Plan Year.
When aggregating two or more Plans in accordance with Section
416(g)(2) of the Code, or as it may be amended, the present value of
the accrued benefits or account balances will be determined separately
for each plan as of such Plan's Determination Date. These Plans will
then be aggregated by adding together the results for each Plan as of
the Determination Dates that fall within three same calendar year.
The present value of the account balance of any Plan Participant as of
the Determination Date is the sum of (a) the Participant's account
balance as of the most recent valuation date occurring within a
12-month period ending on the Determination Date, and (b) an
adjustment for the amount of any Company contribution actually made on
behalf of the Participant after the valuation date, but on or before
the Determination Date. Notwithstanding the above, in the first Plan
Year, the adjustment set forth in paragraph (b) shall include the
amount of any Company contribution made after the Determination Date
if such contributions are allocated to a Participant's Company
contribution account during the first Plan Year.
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SECTION 12
Administration Of The Plan
12.1 Administrative Committee. The Plan shall be administered by the
Committee which shall be responsible for carrying out the provisions
of the Plan, and which shall be the Plan Administrator and Named
Fiduciary as these terms are defined under ERISA. The Committee shall
consist of at least two (2) members who shall be appointed from time
to time by the Board of Directors. Vacancies on the Committee shall
be filled in the same manner as appointment. The Company shall act as
the Committee at any time during which no committee is appointed or
duly constituted hereunder.
Each person appointed a member of the Committee shall signify his
acceptance by filing a written acceptance with the Board of Directors.
Any member of the Committee may be removed by his own accord by
delivering his written resignation to the Board of Directors and to
the Secretary of the Committee.
12.2 Chairman; Subcommittees. The members of the Committee shall elect
from their number a Chairman and shall appoint a Secretary, who need
not be a member of the Committee. They may appoint from their number
such subcommittees with such power as they shall determine, may
authorize one or more of their number or any agent to execute or
deliver any instrument or make any payment in their behalf, and may
employ such clerks, counsel, accounts and actuaries as may be required
in carrying out the provisions of the Plan.
12.3 Meetings. The Committee shall hold. meetings upon such notice, at
such time, and at such place as it may determine.
12.4 Action. A majority of the members of the Committee at the time in
office shall constitute a quorum for the transaction of business. All
resolutions or other actions taken by the Committee shall be by vote
of a majority of those present at a meeting, but not less than two, or
in writing by all the members at the time in office, if they act
without a meeting.
12.5 Compensation. No member of the Committee, who is also an Employee,
shall receive any compensation for his service as such, but the
Company may reimburse any member for reasonable and necessary expenses
incurred.
12.6 Administrative Rulemaking. The Committee shall from time to time
establish rules for the administration of the Plan and the transaction
of its business. Except as herein otherwise expressly provided, the
Committee shall have the exclusive right to interpret the Plan and to
decide any matters arising thereunder in connection with the
administration of the Plan. It shall endeavor to act by general rules
so as not to discriminate in favor of any person. Its decision and
the records of the Committee shall be conclusive and binding upon the
Company, Participants, and all other persons having any interest under
the Plan.
12.7 Plan Records. The Committee shall maintain accounts showing the
fiscal transactions of the Plan, and in connection therewith shall
require the Trustees to submit any necessary reports, and shall keep
in convenient form such data as may be necessary for the
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<PAGE> 41
determination of the assets and liabilities of the Plan. The
Committee shall prepare, annually, a report showing in reasonable
detail the assets and liabilities of the Plan and giving a brief
account of the operation of the Plan for the past year. Such report
shall be submitted to the Board of Directors and shall be filed in the
Office of the Secretary of the Committee where it shall be open to
inspection by any Participant of the Plan.
12.8 Reliance on Advice From Professionals. The members of the Committee
and the officers and directors of the Company shall be entitled to
rely upon all certificates and reports made by any duly appointed
legal counsel. The members of the Committee and the officers and
directors of the Company shall be fully protected against any action
taken in good faith in reliance upon any such certificates, reports or
opinions. All actions so taken shall be conclusive upon each of them
and upon all persons having any interest under the Plan. Each member
of the Committee shall be indemnified by the Company against any and
all claims, loss, damages, expense and liability to which he may be a
party by reason of his membership in the Committee, except in relation
to matters as to which he shall be adjudged in such action to be
liable for negligence or misconduct in the performance of his duty as
such member. The foregoing right of indemnification shall be in
addition to any other rights to which any such member may be entitled
as a matter of law.
12.9 Claims. Claims for benefits under the Plan shall be filed, on the
forms supplied by the Committee. Written notice of the disposition of
a claim shall be furnished the claimant within thirty (30) days after
the application therefore is filed. In the event the claim is denied,
the reasons for the denial shall be cited and, where appropriate, an
explanation as to how the claimant can perfect the claim will be
provided.
12.10 Appeals. Any Employee, former Employee, or beneficiary of either, who
has been denied a benefit, or feels aggrieved by any other action of
the Company, Committee or the Trustee, shall be entitled, upon request
to the Committee and if he has not already done so, to receive a
written notice of such action, together with a full and clear
statement of the reasons for the action. If the claimant wishes
further consideration of his position, he may obtain a form from the
Committee on which to request a hearing. Such form, together with a
written statement of the claimant's position, shall be filed with the
Committee no later than ninety (90) days after receipt of the written
notification provided for above or in Section 12.10. The Committee
shall schedule an opportunity for a full and fair hearing of the issue
within the next thirty (30) days. The decision following such hearing
shall be made within thirty (30) days and shall be communicated in
writing to the claimant.
SECTION 13
Management and Investment Of Trust Assets
13.1 Exclusive Benefit Rule. All assets for providing the benefits of the
Plan shall be held as a trust for the exclusive benefit of
Participants and beneficiaries under the Plan, and no part of the
corpus or income shall be used for, or diverted to, purposes other
than for the exclusive benefit of Participants and beneficiaries under
the Plan. No Participant or
35
<PAGE> 42
beneficiary under the Plan, nor any other person, shall have any
interest in or right to any part of the earnings of the Trust, or any
rights in, to or under the Trust or any part of its assets, except to
the extent expressly provided in the Plan.
13.2 Investment Control. All contributions to the Plan by either the
Participants or the Company shall be committed in trust to the
Trustees. The Trustees shall be appointed from time to time by the
Board of Directors by appropriate instrument, with such powers in the
Trustees as to investment, reinvestment control and disbursement of
the funds as the Board of Directors shall approve and as shall be in
accordance with the Plan. The Board of Directors may remove any
Trustee at any time, upon reasonable notice, and upon such removal or
upon the resignation of any Trustee, the Board of Directors shall
designate a successor Trustee.
13.3 Investment in Qualifying Employer Securities. The Trust is part of a
money purchase pension and stock bonus plan designed to invest
primarily in Qualifying Employer Securities, as provided in the Trust
Agreement. Trust Assets may be used to purchase shares of Qualifying
Employer Securities from company shareholders or from the Company.
The Trustee may also invest Trust Assets in savings accounts,
certificates of deposit, high-grade short-term securities, equity
stocks, bonds, or other investments, or Trust Assets may be held in
cash. All investments of Trust Assets shall be made by the Trustee
only upon the direction of the Committee, and all purchases of
Qualified Employer Securities by the Trustee shall be made at prices
which do not exceed the fair market value of such shares, as
determined in good faith by the Committee. The committee may direct
the Trustee to invest and hold up to 100% of the Trust Assets in
Qualified Employer Securities.
13.4 Acquisition Loans. The Committee may direct the Trustee to incur
Acquisition Loans from time to time to finance the acquisition of
Qualified Employer Securities (Financed Shares) for the Trust or to
repay a prior Acquisition Loan. An installment obligation incurred in
connection with the purchase of Qualified Employer Securities shall
constitute an Acquisition Loan. An Acquisition Loan shall be for a
specific term, shall bear a reasonable rate of interest and shall not
be payable on demand except in the event of default. An Acquisition
Loan may be secured by a collateral pledge of the Financed Shares so
acquired. No other Trust Assets may be pledged as collateral for an
Acquisition Loan, and no lender shall have recourse against Trust
Assets other than any Financed Shares remaining subject to pledge.
Any pledge of Financed Shares must provide for the release of shares
so pledged on pro-rata basis as Principal and interest on the
Acquisition Loan are repaid by the Trustee and such Financed Shares
are allocated to Participants, Company Stock Accounts (as provided in
Section 6). Repayments of principal and interest on any Acquisition
Loan shall be made by the Trustee (as directed by the Committee) only
from Company contributions paid in cash to enable the Trustee to repay
such Loan, forfeitures from Participant accounts, from earnings
attributable to such Company Contributions and from cash dividends
received by the trust. The payments made with respect to an
Acquisition Loan by the Trust during a Plan Year shall not exceed an
amount equal to the sum of such contributions and earnings received
during or prior to the Plan Year less such payments in prior years.
Such contributions and earnings must be
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<PAGE> 43
accounted for separately in the books of accounts of the Trust until
the Acquisition Loan is repaid. The proceeds of an Acquisition Loan
shall be used within a reasonable time offer receipt by the Trust.
Further, all income earned with respect to Unallocated Company Stock
shall be used at the discretion of the Committee to repay the
Acquisition Loan used to purchase such Company Stock. Any income not
so used shall be allocated as income of the Plan.
Should the Company Contributions, earnings attributable to such
Company Contributions and cash dividends received by the Trust on
Financed Shares be insufficient to meet the obligations created by the
Acquisition Loan, then the Trustee shall so advise the Committee. The
Committee may recommend certain actions including but not limited to,
refinancing the original Loan, amendment of the original Loan
Agreement, or the entering into of an additional Acquisition Loan to
repay a prior Acquisition Loan.
13.5 Disbursements. The Committee shall determine the manner in which the
funds of the Plan shall be disbursed in accordance with the Plan and
provisions of the trust instrument, including the form of voucher or
warrant to be used in making disbursements and the qualifications of
persons authorized to approve and sign the same and any other matters
incident to the disbursements of such funds.
13.6 Voting of Company Stock. Pursuant to Section 409(e) of the Code, all
"Registration-Type" Company Stock allocated to a Participant Account
shall be voted by the Trustee in accordance with the instructions of
the Participant.
If the Company Stock is not a registration-type class of securities
pursuant to Section 409(e) of the Code, then Participants are entitled
to direct the Trustee concerning voting allocated stock with respect
to any corporate matter which involves the approval or disapproval of
any corporate merger, consolidation, recapitalization,
reclassification, liquidation, dissolution, sale of substantially all
assets or similar transaction. The Committee shall direct the voting
of such stock in all other matters.
Company Stock which has not yet been allocated and allocated stock for
which no voting direction has been received by Participants in a
timely manner shall be voted by the Trustee in its sole and absolute
discretion.
13.7 Dividends. Dividends paid with respect to Qualifying Employer
Securities held by the Trust shall be applied as follows:
(a) The dividends paid with respect to shares allocated to the
accounts of Participants at the direction of the Committee
shall be either (a) paid in cash directly to such Participants
or their Beneficiaries, or (b) if paid into the plan,
distributed in cash to Participants or their Beneficiaries not
later than 90 days after the close of Plan Year in which paid,
or (c) credited to the Accounts of such Participants, or (d)
if permitted by Section 404(k) of the Code, paid into the plan
and used to repay the Acquisition Loan, with shares released
thereby allocated to such Participants in an
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<PAGE> 44
amount proportional to such dividends for the year for which
such dividends would have been allocated to such Participants.
(b) The dividends paid with respect to unallocated shares shall be
used to repay the Acquisition Loan.
To the extent so applied in either (a) or (b) above, the
dividends so paid shall be deductible to the Company (as
permitted under Section 404(k) of the Code) in the taxable
year of the Company in which the dividend is paid or
distributed to Participants, or applied to repay the
Acquisition Loan.
SECTION 14
Obligations Of The Company
14.1 Limited Liability. The Company shall have no liability in respect to
payments or benefits or otherwise under the Plan, and the Company
shall have no liability in respect to the administration of the Trust
or of the funds, securities or other assets paid over to the Trustees,
and each Participant, each contingent Participant, and each
beneficiary shall look solely to such Trust Fund for any payments or
benefits under the Plan.
SECTION 15
Miscellaneous
15.1 No Assignment, Etc. No benefit payable under the Plan shall be
subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge and any action by way of
anticipating, alienating, selling, transferring, assigning, pledging,
encumbering, or charging the same shall be void and of no effect; nor
shall any benefit be in any manner liable for or subject to the debts,
contracts, liabilities, engagements, or torts of the person entitled
to such benefit, except as specifically provided in the Plan.
15.2 Non-alienation. No benefits under this Plan shall be in any manner
anticipated, alienated, sold, transferred, assigned, pledged,
encumbered or charged, and any attempt to so anticipate, alienate,
sell, transfer, assign, pledge, encumber or charge the same shall be
void; nor shall any such benefits in any manner be liable for or
subject to the debts, contracts, liabilities or engagements of the
person entitled to such benefits as herein provided for him. The
preceding sentence shall also apply to the creation, assignment or
recognition of right to any benefit payable with respect to a
Participant pursuant to a Domestic Relations Order, unless such order
is determined, by the Committee in its sole and absolute discretion,
to be a Qualified Domestic Relations Order.
15.3 No Employment Rights. The establishment of the Plan shall not be
construed as conferring any rights upon any Employee or any person for
a continuation of employment, and shall not be construed as limiting
in any way the right of the Company to discharge any Employee or to
treat him without regard to the effect which such treatment might have
upon him as a Participant in the Plan.
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15.4 Incompetence of Beneficiary. If any person entitled to receive any
benefits from the Trust Fund is, in the judgment of the Committee,
legally, physically, or mentally incapable of personally receiving and
receipting for any distribution, the Committee may instruct the
Trustees to make distribution to such other person, persons or
institutions as, in the judgment of the Committee are then maintaining
or have custody of such distributes.
15.5 Conclusiveness of Committee Decisions. The determination of the
Committee as to the identity of the proper payee of any benefit under
the Plan and the amount of such benefit properly payable shall be
conclusive, and payment in accordance with such determination shall
constitute a complete discharge of all obligations on account of such
benefit.
15.6 Inability to Locate Beneficiary. In the event an amount is payable
from the Trust Fund to a beneficiary or the executor or administrator
of any deceased Participant and if, after written notice from the
Trustees mailed to such person's last known address as certified to the
Trustees by the Committee, such person or such executor or
administrator shall not have presented himself to the Trustees within
six (6) years after the mailing of such notice, the Trustees shall
notify the Committee and the Committee shall instruct the Trustees to
distribute such amount due to such beneficiary or such executor or
administrator among one or more of the spouse and blood relatives of
such deceased person, designated by the Committee.
15.7 Mergers, Etc. In the case of any merger, consolidation with or
transfer of assets or liabilities to any other plan, each Participant
in the Plan shall, (if the plan is terminated), receive a benefit
under this Plan immediately after the merger, consolidation or
transfer, which is equal to or greater than the benefit under this
Plan he would have been entitled to receive immediately before the
merger, consolidation or transfer if the plan had been terminated.
SECTION 16
Amendments
16.1 Amendments. The Company reserves the right at any time, and from time
to time, by action of the Board of Directors, to modify or amend in
whole or in part any or all of the provisions of the Plan. This right
of the Company is subject to the conditions:
(a) that no modification or amendment may be made which will
adversely affect the existing account balances or optional
forms of benefits of any Participant or beneficiary; and
(b) that no part of the assets of the Plan shall, by reason of any
modification or amendment, be used for or diverted to,
purposes other than for the exclusive benefit of Participants
and beneficiaries under the Plan.
16.2 ESOP Status. If the Company amends this Plan to no longer primarily
invest in Qualifying Employer Securities, thus ceasing to be an ESOP,
Section 17.2 will apply.
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16.3 Vesting Rule. In the event that the vesting schedule of this Plan is
amended, any Participant who has completed at least three (3) Years of
Service may elect to have his vested interest determined without
regard to such amendment by notifying the Plan Administrator in
writing during the election period as hereinafter defined. The
election period shall begin on the date such amendment is adopted and
shall end no earlier than the latest of following dates:
(a) The date which is sixty (60) days after the day the amendment
is adopted;
(b) The date which is sixty (60) days after the day the amendment
becomes effective; or
(c) The date which is sixty (60) days after the day the
Participant is issued written notice of the amendment by the
Company or Plan Administrator.
Such election shall be available only to an individual who is
a Participant at the time such election is made and such
election shall be irrevocable.
SECTION 17
Suspension, Discontinuance and Plan Termination
17.1 Permanence. The Company intends this Plan to be permanent and to
qualify under Section 401 of the Internal Revenue Code of 1986, as
that statute may from time to time be amended or supplemented.
However, the Plan may be discontinued by the Board of Directors, but
only upon condition that such action is taken under the Trust
Agreement established under the Plan and as such shall render it
impossible for any part of the corpus of the Trust or income thereon
to be at any time used for, or diverted to, purposes other than for
the exclusive benefit of Participants and beneficiaries. Upon
termination, partial termination, or upon complete discontinuance of
contributions all affected Participants' Accounts shall be considered
as fully vested and nonforfeitable and all unallocated assets of the
Trust, including but not limited to Company contributions and
unallocated Trust assets and earnings thereon, shall be allocated to
the accounts of all Participants as of the next Valuation Date (or if
the Plan is being terminated immediately, than on the date of such
Plant Termination as if it were the next Valuation Date) in accordance
with the provisions of the Plan hereof; and shall be applied for the
benefit of each such Participant either by a lump-sum distribution, or
by the continuance of the Trust and the payments of benefits
thereunder in the manner provided in the Plan. After initial
qualification by the Internal Revenue Service, there will be no
reversion of assets to the Company under any circumstances. All
Participants shall be treated in a uniform and nondiscriminatory
manner.
17.2 Cessation of ESOP Status. If this Plan ceases to be an ESOP, the
proceeds of an Acquisition Loan will be used within a reasonable time
after receipt by the Plan either to acquire Qualifying Employer
Securities or to repay the loan or a prior Acquisition Loan. Even if
the Plan ceases as an ESOP, any Qualifying Employer Security acquired
with the
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<PAGE> 47
proceeds of an Acquisition Loan will be subject to a put option if the
Company Stock is not publicly traded when distributed, or if the
Company Stock is subject to a trading limitation when distributed.
The put option must be exercisable at least during a 15-month period
which begins on the date the Company Stock is subject to the put
option is distributed by the Plan. The price at which the put option
will be exercisable will be the value of the Company Stock as of the
date of exercise or as of the most recent Valuation Date. If the
transaction takes place between the Plan and a disqualified person,
value will be determined as of the date of the transaction.
17.3 Cash Merger or Sale of the Company. Notwithstanding anything herein
to the contrary, in the event that the Company or all of the Company's
outstanding Company Stock shall be acquired for cash through merger or
sale by an unrelated third party, then the Plan shall automatically be
terminated without further action or notice effective on the date of
such sale or merger; all Participant Accounts shall be considered
fully vested and non-forfeitable as of such date of termination; all
Company contributions, dividends on Company Stock and earnings on
Participant Account assets paid to the Trust or earned by the Trust
since the most recent Valuation Date shall be allocated to the
accounts of all Participants as of the date of termination of the Plan
as if it were the next valuation Date in accordance with the
provisions of the Plan; and all funds realized by the Trust with
respect to any Financed Shares remaining as collateral on any
Acquisition Loans which shall be exchanged for cash in such merger or
sale after repayment of all Acquisition Loans shall have been made
shall be allocated to the accounts of all Participants pro rata based
on the total value of assets allocated to each Participant's Account
as a percentage of the total value of assets allocated to all
Participant Accounts and held in the Trust as of the date of
termination of the Plan. Upon such termination of the Plan and
completion of the final accounting and allocation of the Trust assets,
all such Participant Accounts which shall account for all Trust assets
shall be distributed in a lump sum to each Participant as soon as
administratively feasible.
SECTION 18
Inclusion Of Other Companies
18.1 Joinder Generally. Any company which is or becomes a subsidiary,
Affiliate or associated company of the Company, may, with the
approval of the Board of Directors of the Company, adopt this Plan
with respect to its Employees.
18.2 Joinder -- Terms and Condition. With respect to the Employees of any
such subsidiary, Affiliate or associated companies which may become
included in the Plan, the Board of Directors of the Company shall
determine the extent, if any, to which the period of prior employment
therewith or with any predecessors thereof shall be recognized as
service for the purposes of this Plan.
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<PAGE> 48
PART II
OF THE MET HOLDINGS CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
--------------------
TRUST AGREEMENT
--------------------
EFFECTIVE DATE: JANUARY 1, 1992
<PAGE> 49
AGREEMENT made as of the 27th day of December, 1992 by and between Met
Holdings Corporation, a corporation duly organized and existing under the laws
of Delaware (hereinafter referred to as the "Company") and David A. Smilow,
William K. Beauchesne and Thomas Leaton, as trustees of the Met Holdings
Corporation Employee Stock Ownership Plan (the "Plan"). The term "Trustee"
shall refer herein to the trustees when acting singularly or collectively in
their capacity as trustee of the Plan.
W I T N E S S E T H
WHEREAS, the Company did adopt the Met Holdings Corporation Employee
Stock Ownership Plan, effective January 1, 1992; and,
WHEREAS, the contributions of the Company to the Plan are to be placed
in trust for the exclusive benefit of Participants and Beneficiaries under the
Plan,
NOW, THEREFORE, the undersigned hereby establish this trust, to be
called the Met Holdings Corporation Employee Stock Ownership Plan Trust and
mutually covenant and agree as follows:
<PAGE> 50
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION NUMBER PAGE
- -------------- ----
<S> <C> <C>
1. Creation of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Payments From Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. Investments, Life Insurance and Annuity Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. Powers and Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. Records and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7. Trustee's Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
8. Compensation of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9. Removal, Resignation of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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Part II
SECTION 1
Creation of Trust
1.1 Any term used in this Trust Agreement which is defined in the Plan
shall have the meaning set forth in such Plan, as in effect from time
to time.
1.2 The Company hereby establishes with the Trustee, pursuant to the Plan,
a Trust comprising such funds as shall from time to time be deposited
with the Trustee by or on behalf of the company and the Participants
and any increments thereto and any income therefrom. All such
property, hereinafter collectively referred to as the "Trust Fund"
shall be held by the Trustee in trust, as herein provided. The Trust
Fund shall be held for the exclusive benefit of Participants and
Beneficiaries and no part of the corpus or income shall be used for or
diverted to, purposes other than for the exclusive benefit of
Participants and Beneficiaries under the Plan.
SECTION 2
Payments From Trust Fund
2.1 The Trustee shall, from time to time, on the written authority of the
Committee established under the Plan, make payments out of the Trust
Fund to such persons, in such manner, in such amounts, and for such
purposes as may be specified in such authority. Each such written
authority shall be accompanied by a certification that such amounts
are for the payment of benefits under the Plan or for the payment of
expenses of administering the Plan. The Trustee shall not be
responsible in any way with respect to the application of such
payments or for the adequacy of the Trust fund to meet and discharge
any and all liabilities under the Plan.
2.2 It shall be the duty of the Company, subject to the provisions of the
Plan, to certify to the Trustee the names and specimen signature of
the members of the Committee acting from time to time; to pay over to
the Trustee from time to time its contributions to the trust fund as
provided in the Plan; and to keep accurate books and records with
respect to the Participants and their compensation.
2.3 All payments of benefits under the Plan shall be made exclusively from
the assets of the trust fund as they may be constituted at the time or
times of payment, and no person shall be entitled to look to any other
source for such payments.
2.4 The Trustee shall be entitled to pay any and all expenses of
administering the Trust Fund held hereunder out of the income or
principal of the Trust Fund to the extent that such expenses are not
paid by the Company.
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2.5 In case of doubt concerning the course of administration of the Trust
Fund, the Trustee may request advice from the Committee and shall be
fully protected in relying upon such advice when given.
2.6 No distribution or payment to any Participant or his Beneficiary under
this Trust or the Plan shall be subject in any manner to anticipation,
sale, transfer, assignment or encumbrance, whether voluntary or
involuntary, and no attempt to so anticipate, sell, transfer, assign
or encumber the same shall be valid or recognized by the Trustee, no
shall any such distribution or payment be in any way liable for or
subject to the debts, contract, liabilities or torts of any person
entitled to such distribution or payment, except to the extent as may
be required by law or exclusively provided for in the Plan. If the
Trustee is notified by the Committee that any such Participant or
Beneficiary has been adjudicated bankrupt or has purported to
anticipate, sell, transfer, assign or encumber any such distribution
or payment, voluntarily or involuntarily, the Trustee shall, as so
directed by the Committee, hold or apply such distribution or payment
or any part thereof to or for the benefit of such Participant or
Beneficiary as the Committee shall direct.
2.7 In the event that any distribution or payment directed by the
Committee shall be mailed by the Trustee to the person specified in
such direction at the latest address of such person on file with the
Committee and shall be returned to the Trustee because such person
cannot be located at such address, the Trustee shall properly notify
the Committee of such return. Upon the expiration of sixty (60) days
after such notification, such direction shall become void and unless
and until further direction by the Committee is received by the
Trustee with respect to such distribution or payment, the Trustee
shall thereafter continue to administer the Trust as if such direction
had not been made by the Committee. The Trustee shall not be
obligated to search for or ascertain the whereabouts of any such
person.
2.8 Where distribution is directed to be made in Company Stock, the
Committee or the Trustee shall cause the Company to issue an
appropriate stock certificate to the person entitled thereto, to be
delivered to such person by the Committee; provided that the Committee
and the Trustee (as directed by the Committee) shall comply with the
provisions of the Plan relating to the repurchase of Company Stock by
the Company or by the Trust. Any portion of a Participant's Account
balance to be distributed in cash shall be paid by the Trustee
furnishing its check to the Committee for delivery to the Participant
(or Beneficiary).
SECTION 3
Investments, Life Insurance and Annuity Contracts
3.1 Investments
The Trustee is expressly authorized and empowered to receive and
retain any property and investments transferred to the Trustee
pursuant to the provisions of this agreement and to invest and
reinvest any and all of the funds and property at any time in the
Trustee's
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possession or held in trust by them under the provisions of this
agreement in any property, real or personal, or part interest therein,
wherever situated, without regard to the proportion such property or
property of a similar character so held may bear to the entire amount
held and whether or not the same be authorized by law for the
investment of Trust Funds, including but not limited to those
investments made by the Trustee of its commingled funds, common and
preferred stocks (including Common Stock of the Company), shares of
open-end management type investment companies, as defined in the
Investment Company Act of 1940, personal, corporate and governmental
obligations, trusts and participation certificates, oil, mineral or
gas properties, royalties, interest rights, including equipment
pertaining thereto, leases, mortgages and other interests in realty,
notes and other evidences of indebtedness or ownership, secured or
unsecured, contracts and chooses in action, or on deposit with any
savings banks, trust companies or other financial institutions.
3.2 Insurance Contracts
The Trustee may invest in life insurance contracts, or may purchase
non-transferable annuity contracts, if deemed appropriate by the
Company to properly carry out or safeguard the obligations under the
Plan subject to the limitations under the Code.
3.3 The Trustee in its discretion may, or at the discretion of the
Committee established under the Plan shall, retain in cash and keep
unproductive of income such amounts of the Trust Fund as they may deem
advisable or the Committee may direct. The Trustee shall not be
required to pay interest on such cash balances, or on cash held
pending investment.
SECTION 4
Powers of Trustee
4.1 The Trustee is authorized and empowered in their discretion, but not
by way of limitation:
(a) to purchase, or subscribe for, any securities or other
property, and to retain the same in trust;
(b) to sell, exchange, convey, transport or otherwise dispose of
and to grant options with respect to, any securities or
property held by them, by private contract or public auction.
Any sale may be made for cash or upon credit, or partly for
cash or partly upon credit as the Trustee may deem advisable.
No person dealing with the Trustee shall be bound to see to
the application of the purchase money or to inquire into the
validity, expediency or propriety of any such sale or
disposition;
(c) to retain, manage, operate, repair, improve, develop,
preserve, mortgage or lease for any period any real property
or any oil, mineral or gas properties, interests or rights
held by the Trustee or by any corporation organized by them
pursuant to this trust agreement upon such terms and
conditions as the Trustee deems proper, either alone or by
joining with others using other trust assets for any of such
purposes if by them deemed advisable; to modify, extend, renew
or otherwise
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adjust any or all of the provisions of any such mortgage or
lease, including the waiver of rentals, if by them deemed
advisable; and to make provision for the amortization of the
investment in or depreciation of the value of such property as
they may deem advisable;
(d) except as provided otherwise in the Plan with respect to
Qualifying Employer Securities, to vote personally, or by
general or limited proxy, any shares of stock which may be
held by them at any time; to exercise personally, or by
general or limited power of attorney, any right with respect
to any securities or any other property held by them at any
time; to exercise any conversion privilege, option and
subscription right available in connection with any security
or other property held by them at any time; to oppose or
consent to the reorganization, consolidation, liquidation,
sale, merger, or readjustment of the finances of any
corporation, company or association; or to the sale, mortgage,
pledge or lease of the property of any corporation, company or
association any of the securities of which are held by them at
any time; to hold and retain any securities or other property
which they may so acquire; and generally, to exercise any of
the powers of an owner with respect to stock, bonds,
securities, or other property held as part of the Trust Fund;
(e) to cause any securities or property held as part of the Trust
Fund to be registered in their own names or in the name of one
or more of their nominees, with or without designating the
same as trust property and to hold any investments in bear
form, but any such registration or holding by the Trustee
shall not relieve it from responsibility for the safe custody
and disposition of the Trust Fund, in accordance with the term
and provisions of this agreement;
(f) to borrow or raise money for the purpose of the trust in such
amounts and upon such terms and conditions as the Trustee
shall deem advisable, and for any sum or sums so borrowed, to
issue its promissory notes as Trustee, and to secure the
repayment thereof by pledging all or any part of the Trust
Fund. No person lending money to the Trustee shall be bound
to see to the application of the money lent or to inquire into
the validity, expediency or propriety of any such borrowing;
(g) to make, execute, acknowledge and deliver as the Trustee, with
or without a provision disclaiming individual liability on the
part of any or all of them, any and all deeds, leases,
mortgages, conveyances, contracts, waivers and releases;
(h) to settle, compromise, or submit to arbitration any claims,
debts or damages due to or owing from the Trust Fund; to
commence or defend suits and legal and administrative
proceedings; to renew or extend any mortgage, upon such terms
and conditions as they deem advisable; to agree to a reduction
in the rate of interest on any mortgage or to any other
modification or change in the terms of any mortgage or the
guaranty pertaining thereto, in any manner, and to any extent
they may deem advisable for the protection of the Trust Fund
or the preservation of the value of the investment; to waive
default, whether in the performance of any
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<PAGE> 55
covenant or condition of any mortgage, or in the performance
of any guaranty, or to enforce any such default in such manner
and to such extent as they may deem advisable; to exercise and
enforce any and all rights of foreclosure; to bid on property
in foreclosure; to take a deed in lieu of foreclosure with or
without paying a consideration therefore, and in connection
therewith, to release the obligation on the bond secured by
such mortgage; and to exercise and enforce in any action, suit
or proceeding, at law or in equity, any rights or remedies in
respect to any such mortgage or guaranty.
The Trustee shall not be obligated to take any action or to
appear or participate in any action or proceeding which the
Trustee would subject itself to expenses or liabilities unless
they shall first be indemnified by the Company in the amounts
and in the manner satisfactory to them, or they shall be
furnished with funds sufficient in the Trustee's sole judgment
to cover the same;
(i) to consult with legal counsel (who may be of counsel to the
Company) concerning any question which may arise with
reference to the Trustee's duties under this Agreement, and
the opinion of such counsel shall be full and complete
protection in respect to any action taken or suffered by the
Trustee hereunder in good faith and in accordance with the
opinion of such counsel.
The Trustee may employ such counsel, accountants, actuaries,
investment advisors and other agents as it shall deem
advisable. The Trustee may charge the compensation of such
counsel, accountants, actuaries, investment advisors, and
other agents, against the Trust Fund, to the extent that they
are not paid by the Company. The Trustee may charge the
compensation of the Trustee against the Trust Fund to the
extent that they are not paid by the Company;
(j) to pool all or any of the assets of the Trust Fund, from time
to time, with assets belonging to other trusts created by the
Company or any company which is or becomes a subsidiary,
affiliated or associated Company and to commingle such assets
and make joint or common investments and carry joint accounts
on behalf of this Trust Fund and such other trust, allocating
undivided shares of such investments, accounts and pooled
assets to the two or more trusts in accordance with their
respective interest;
In addition, the Trustee may, from time to time, transfer to a
pooled investment trust fund or commingled trust fund all or
such part of the Trust Fund as it deem advisable, to be
commingled with the assets of trust funds created by other
employers, for investment purposes. Such part of the Trust
fund so transferred shall be subject to the terms and
provisions of such pooled or commingled investment trust fund.
Any commingling of the Trust Fund shall be made only with
funds held under a plan which qualified under Section 401 and
501 of the Code of 1986, as such statute may be from time to
time amended or supplemented;
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<PAGE> 56
(k) to do any and all such acts, take all such proceedings, and
exercise all such rights and privileges, although not
specifically designated herein, as the Trustee may deem
necessary to administer the Trust Fund and to carry out the
purposes of this trust;
(l) to continue to have and exercise after the termination of the
Plan and until final distribution, all the title, powers,
discretions, rights and duties conferred or imposed upon the
Trustee hereunder or by law;
(m) to act in any jurisdictions without being required to furnish
any bond or other security to insure the faithful performance
of their duties;
(n) to grant options and to write call options against any
securities or other properties or other forms of options
directly related, any such call options outstanding upon such
terms and for such length of time as then shall seem proper;
(o) In the event that the Committee directs the Trustee to dispose
of any Company Stock held as Trust Assets, under circumstances
which require registration and/or qualification of the
securities under applicable Federal or state securities laws,
then the Company, at its own expense, will take, or cause to
be taken, any and all such actions as may be necessary or
appropriate to effect such registration and/or qualification.
4.2 Notwithstanding anything to the contrary in this Section 4 or any
other section of this Trust Agreement, the Trustee shall not:
(a) Divert any part of the Trust Fund to any purpose other than
for the exclusive benefit of Participants, former
Participants, and Beneficiaries under the Plan.
(b) Make an investment which would be in conflict with the
"prohibited transactions" provisions of the Code as currently
defined and as hereafter amended or with the provisions of the
Employee Retirement Income Security Act of 1974 as currently
defined and as hereafter amended, for which there is no
exemption.
(c) Participate knowingly in or knowingly undertake to conceal an
act or omission of any Fiduciary to the Plan (as Fiduciary is
defined in Section 3(21) of the Employee Retirement Income
Security Act of 1974, as amended, the "Act") knowing such act
or omission is a breach.
(d) Conduct itself in the administration of its specific
responsibilities hereunder which give rise to its status as a
Fiduciary so as to enable another Fiduciary to commit a
breach.
4.3 If the Trustee has knowledge of a breach by any other Fiduciary to the
Plan, the Trustee shall make reasonable efforts under the
circumstances to remedy the breach.
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4.4 Notwithstanding anything to the contrary in this Section 4 or any
other section of this Trust Agreement, the Committee duly acting under
the Company's Plan shall at all times have the power, but shall not be
obligated to direct the Trustee in the exercise of any of the powers
granted in Section 4.1 above. The Trustee shall make regular reports
not less frequently than quarter-annually concerning the exercise of
its investment powers under this Section 4 to such Committee, which
Committee may issue such directions to the Trustee as it deems
advisable. In the absence of any such directions, the Trustee shall
be free to exercise its powers hereunder in its own discretion. When
acting under such directions, the Trustee shall be free of all
liability whatsoever arising as a result of, or attributable to, its
actions or failure to act pursuant to such directions. Investments
directed by the Committee shall not be in conflict of the "prohibited
transactions" provisions of the Internal Revenue Code that is
currently defined and as hereafter amended or with the provisions of
the Employee Retirement Income Security Act of 1974 as currently
defined and hereafter amended, for which there is no exemption.
4.5 The Trustee shall discharge its duties under this Agreement solely in
the interests of the Participants of the Plan and their Beneficiaries
and for the exclusive purpose of providing benefits to such
Participants and their Beneficiaries and defraying reasonable expenses
of administering the Plan, with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent man
acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and with like aims,
and by diversifying the investments of the Plan so as to minimize the
risk of large losses, unless under the circumstances it is clearly
prudent not to do so, all in accordance with the provisions of this
Trust Agreement so far as they are consistent with the provisions of
the Employee Retirement Income Security Act of 1974, as this agreement
and the said act may be from time to time amended; but the duties and
obligations of the Trustee as such shall be limited to those expressly
imposed upon by this Trust Agreement notwithstanding any reference
herein to the Plan, or to the provision thereof, it being hereby
expressly agreed that the Trustee is not a party to the Plan.
4.6 Notwithstanding anything to the contrary in this Section 4 or any
other section of this Trust Agreement and pursuant to Section 409(e)
of the Code, all "Registration-Type" Company stock allocated to a
Participant's Account shall be voted by the Trustee in accordance with
the instructions of the Participant.
If the Company Stock is not a registration-type class of securities pursuant to
Section 409(e) of the Code, the Participants are entitled to direct the Trustee
concerning voting allocated stock with respect to any corporate matter which
involves the approval or disapproval of any corporate merger or consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all assets or similar transaction. The Committee shall direct
the voting of such stock in all other matters.
Company Stock which has not yet been allocated and allocated stock for which no
voting direction has been received by Participants in a timely manner shall be
voted by the Trustee in the same manner as such allocated shares are voted by
Participants; provided that if Participants make no directions as to the voting
of allocated shares or if no shares are allocated to Participants, the
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unallocated shares shall be voted as directed by the Committee, or otherwise by
the Trustee in its discretion.
SECTION 5
Amendment
5.1 The Company reserves the right, at any time and from time to time, by
action of its Board of Directors and by notice to the Trustee to
modify or amend, in whole or in part any or all of the provisions of
this Agreement; provided that no such modification or amendment shall
make it possible for any part of the Trust Fund to be used for, or
diverted to, purposes other than for the exclusive benefit of
Participants and their Beneficiaries under the Plan or the
administrative expenses of the Plan and provided that no modification
or amendment shall be effective until filed with the Trustee and until
the Company certifies to the Trustee that such modification or
amendment does not make it possible for any portion of the Trust Fund
to be returned to the Company; and provided further, that no
modification or amendment which affects the rights, duties or
responsibilities of the Trustee may be made without their consent.
Any modification or amendment may be made retroactively effective if
in the opinion of the Board of Directors of the Company such
modification or amendment is necessary or advisable.
SECTION 6
Records and Reports
6.1 The Trustee shall keep accurate and detailed accounts of all
investments, receipts, disbursements, valuations of the Trust Fund,
and other transactions. All accounts, books and records relating to
such transactions shall be open at all reasonable times to inspection
by any person or persons designated in writing by the Company.
6.2 Within ninety (90) days following the close of each fiscal year of the
Company, the Trustee shall file a written report with the Company and
the Committee established under the Plan setting forth their
determination of the fair market value of all assets in the Trust Fund
as of the close of business on the last of each such fiscal year, or
if such day is not a business day, as of the close of business on the
next preceding business day. Each such report shall also contain a
written accounting setting forth all investments, receipts,
disbursements, and other transactions effected by the Trustee during
the preceding fiscal year, the net earnings or losses of the Trust
Fund for such fiscal year, and the securities and other property held
at the end of such period. Each such annual report shall not include
any contributions made by the Company or the Participants as of or
subsequent to such Valuation Date. In addition to the annual
valuations and reports required under this Section, the Trustee shall
prepare valuations and reports on such other occasions as may be
required under the Plan.
6.3 Within ninety (90) days from the date of filing an account referred to
in this Section, the Committee may file with the Trustee either its
written approval, or its written disapproval, with the reasons
therefore, of the account so rendered. Upon the filing of such
approval
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of the Trustee's account, or at the expiration of ninety (90) days
after the filing of such account if neither written approval nor
disapproval thereof shall have been filed with the Trustee, the
account of the Trustee shall be deemed to have been approved and the
Trustee shall be forever relieved from all liability, responsibility
and accountability for its acts as set forth in said account.
SECTION 7
Trustee's Responsibilities
7.1 The Trustee and the members of the Committee shall discharge their
duties with respect to the Trust solely in the interest of the
Participants in the Participating Plans and their Beneficiaries and
with the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise
of a like character and with like aims.
7.2 No Fiduciary under this Agreement shall be liable for an act or
omission of another person in carrying out any fiduciary
responsibility where such fiduciary responsibilities are allocated to
such other persons by this Agreement or pursuant to a procedure
established in this Agreement except to the extent that:
(a) such Fiduciary participated knowingly in, or knowingly
undertook to conceal, an act or omission of such other person,
knowing such act or omission to be a breach of fiduciary
responsibilities;
(b) such Fiduciary, by his failure to comply with Section
404(a)(1) of the Act (or any successor statutory provision) in
the administration of his specific responsibilities which give
rise to his state as a fiduciary, has enabled such other
person to commit a breach of fiduciary responsibility;
(c) such Fiduciary has knowledge of a breach of fiduciary
responsibility by such other person, unless he makes
reasonable efforts under the circumstances to remedy the
breach; or
(d) such Fiduciary is a "named fiduciary" (as such term is defined
in Section 402(a)(2) of the Act, or any successor statutory
provision) and has violated his duties under Section 404(a)(1)
of the Act (or any successor statutory provision);
1. with respect to the allocation of fiduciary
responsibilities among named fiduciaries or the
designation of persons other than named fiduciaries
to carry out fiduciary responsibilities under this
Agreement;
2. with respect to the establishment or implementation
of procedures for allocating fiduciary
responsibilities among named fiduciaries or for
designating persons other than named fiduciaries to
carry out fiduciary responsibilities under this
Agreement; or
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3. in continuing the allocation of fiduciary
responsibilities among named fiduciaries or the
designation of persons other than named fiduciaries
to carry out fiduciary responsibilities under this
Agreement.
7.3 Anything in this Agreement, or any amendment thereof, to the contrary
notwithstanding, no provision of this Agreement shall be so construed
as to violate the requirements of Section 404, 405, 406 and 407 of the
Act (or any successor statutory provision).
7.4 The Trustee shall obtain not less often than annually Independent
Appraisals of the valuations of Employer Securities which are not
readily tradable on an established securities market with respect to
activities carried on by the Plan. The Independent Appraiser shall
meet the requirements similar to those contained in Treasury
regulations under Section 170(a)(1) and 401(a)(28)(C) of the Code.
SECTION 8
Compensation of Trustee
8.1 The Trustee shall be reimbursed for any reasonable expenses including
counsel, accounting, actuarial and investment advisory fees, incurred
by it in the administration of the Trust Fund. Such expenses and all
taxes of any and all kinds whatsoever that may be levied upon, or in
respect of the Trust Fund or the income thereof, shall be paid by the
Company.
8.2 The Trustee shall not be liable for making, holding, or disposing of
any investment permitted by this agreement or for failing to make,
hold, or dispose of any such investment, so long as the Trustee has
acted with such prudence, diligence, care, and skill under the
then-current circumstances as a prudent person acting in a similar
fiduciary capacity and familiar with such matters would employ in
administering a trust of this type. The Trustee shall be completely
protected in acting, or failing to act, in reliance upon any properly
communicated instruction or direction of the Administrator, and also
in reliance upon any instrument, document, certificate, or other paper
reasonably believed by the Trustee to be genuine and to be signed or
presented by the proper person.
SECTION 9
Appointment, Removal, Resignation of Trustee
9.1 The Board of Directors of the Company may appoint or remove the
Trustee, or any individual serving as one of the trustees, at any
time, by giving written notice to such Trustee, the remaining Trustee
or individual trustee(s) and the Committee established under the Plan.
Any Trustee or individual trustee(s) may resign, at any time, by
giving sixty (60) days written notice to the remaining Trustee or
individual trustee(s), the Company and the Committee. The removal or
resignation of a Trustee or individual trustee(s) shall be effective
as of the date specified in the notice.
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9.2 In the event of a vacancy in the office of Trustee arising by death,
removal, resignation, refusal to act, or inability to act of any
trustee or individual trustee(s), the Board of Directors of the
Company shall appoint a Successor Trustee who, upon acceptance of such
appointment, shall have the same powers and duties as those conferred
upon the original Trustee hereunder, and the title to all of the funds
and properties constituting the Trust Fund shall vest jointly in those
who shall from time to time be the Trustee hereunder. Upon request of
such Successor Trustee, the Company and the Trustee ceasing to act
shall execute and deliver such instruments of conveyance and further
assurance and do such other things as may reasonably be required to
more fully and certainly invest and confirm in such Successor Trustee
all the right, title and interest of the retiring Trustee in and to
the Trust Fund.
9.3 A Successor Trustee, in the administration of the Trust Fund shall be
governed by this Agreement, and have all the powers herein given to
the Trustee, subject to such further restrictions as the Board of
Directors of the Company may then determine. At any time advisable in
their judgment, the Board of Directors of the Company may terminate
the administration of the Trust Fund by individual Trustee, and may
appoint as Trustee, an incorporated Trust Company. Pending the
appointment of any Successor Trustee and the acceptance of such
appointment, the remaining Trustee shall have full power to take any
action authorized under this agreement.
9.4 No Successor Trustee shall be liable or responsible for anything done
or omitted in the administration of the Trust prior to the date it
became such Successor Trustee, nor, except upon the Employer's written
direction, shall it be required to audit or otherwise inquire into or
take any action concerning the acts of any predecessor Trustee.
SECTION 10
Taxes
10.1 This Agreement and Trust hereby created are part of the Plan for the
exclusive benefit of the Participants and Beneficiaries under the
Plan, which Plan the Company intends shall qualify under Section
401(a) of the Code, until advised to the contrary, that the trust is
exempt from tax under Section 501(a) of the Code. However, any taxes
that may be assessed on or in respect of the Trust Fund shall be a
charge against the Trust Fund. The Trustee may assume that any taxes
assessed on or in respect of the Trust Fund are lawfully assessed
unless the Company shall in writing advise the Trustee that, in the
opinion of its counsel, such taxes are not lawfully assessed. In the
event that the Company shall so advise the Trustee, the Trustee shall
contest the validity of such taxes in any manner deemed appropriate by
the Company or its counsel, but at the expense of the Company; or the
Company may itself contest the validity of any such taxes in any
manner deemed appropriate by it or its counsel. The word "taxes" in
this Section 10 shall be deemed to include any interest or penalties
that may be levied or imposed in respect to any taxes.
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SECTION 11
Miscellaneous
11.1 In any action or proceeding involving this Agreement, or its
administration, the Company and the Trustee shall be the only
necessary parties, and no Participant or his Beneficiary or any other
person having or claiming to have an interest in the Trust Fund shall
be entitled to any notice of process.
11.2 Headings of Sections of this Agreement are inserted for convenience of
reference. They constitute no part of this agreement and are not to
be considered in the construction hereof.
11.3 Wherever any words are used herein in the masculine gender they shall
be construed as though they were also in the feminine gender, in all
cases where they would so apply. Wherever any words are used herein
in the singular form they shall be construed as though they were used
in the plural form, and vice versa, in all cases where they would so
apply.
11.4 This Agreement and all of its provisions shall be construed according
to the laws of the Commonwealth of Virginia and all provisions shall
be administered according to, and their validity shall be determined
under, such laws.
11.5 Any subsidiary, affiliated or associated company of the Company which
has been authorized by the Company to participate in the Plan with
respect to its employees may hereafter become a party to this
agreement by executing and delivering to the Trustee an instrument in
writing executed in the same manner as this agreement, accepting and
adopting the provisions of this agreement on behalf of such Company,
to which shall be appended the consent of the Company and the
acceptance of the Trustee. No consent of any subsidiary, affiliated
or associated company shall be requisite or necessary to the inclusion
of any other subsidiary, affiliated or associated company as a party
of this agreement.
11.6 (a) The Company shall indemnify the Trustee against any liability
to any Participant or Beneficiary under the Plan for any
action taken by the Trustee under directions from the
Committee.
(b) The Company or the Trustee may purchase insurance to secure
themselves, the Trust Fund, or other fiduciaries against
liability or losses occurring by reason of an act or omission
of any fiduciary, provided that such insurance shall permit
recourse by the insurer against the fiduciary in case of a
breach of fiduciary duty.
11.7 The Trustee shall use ordinary care and reasonable diligence in the
exercise of its powers and the performance of its duties as Trustee
hereunder, but shall not be liable for any mistake in judgment or
other action taken in good faith, or for any loss, unless resulting
from its own negligence, willful misconduct, or lack of good faith.
11.8 The Company may engage any person or corporation as its agent in the
performance of any duties required of the Company or the Committee
under the Plan, but such agency
-12-
<PAGE> 63
employment shall not be deemed to increase the responsibility or
liability of the Trustee as Trustee under this Trust Agreement.
11.9 The Trustee shall not be bound by any notice, direction or other
communication provided by the Committee unless and until it shall
have been received in writing, signed by a majority of the members of
such Committee, at its principal office. Notices and communications
from the Trustee to the Committee shall be addressed to the members as
then certified to the Trustee by the Company at the office of the
Company. In all matters wherein the Trustee is entitled to rely upon
directions or communications from the Committee, the Trustee shall be
entitled to so rely whether or not there are at least three (3)
members of such Committee, as long as such directions or
communications are signed by a majority of the then members of the
Committee as certified to the Trustee by the Company. If at any time
there shall be no member as such Committee acting, the Trustee shall
be entitled to look to the Company itself for all directions and
communications which would otherwise come from the Committee.
11.10 This Trust shall be deemed a Commonwealth of Virginia Trust, and its
validity, construction and effect shall be governed by the law of such
state. It is the intent of the parties that this Trust be a Trust
exempt from income taxation under the Federal income tax laws, and any
ambiguities in construction shall be resolved in favor of
interpretations which will effectuate such intention.
11.11 This Agreement shall be effective as of January 1, 1992.
11.12 Mistaken Contributions
Except as otherwise provided herein, the assets of the Plan shall not
inure to the benefit of the Company, and shall be held for the exclusive
purposes of providing benefits to Participants and Beneficiaries and defraying
reasonable expenses of administering the Plan. Notwithstanding the foregoing
sentence:
(a) If a contribution is made by the Company under a mistake of
fact, such contribution may be returned, at the discretion of
the Company, within one (1) year after payment of such
contribution.
(b) All contributions to the Plan are conditioned on the initial
qualification of the Plan under Section 401 of the Code. If
the Plan does not so qualify initially for any Plan Year for
which a contribution is made, such contribution may be
returned, at the discretion of the Company, within one (1)
year after the date of denial of the initial qualification of
the Plan.
(c) All contributions to the Plan are conditioned upon the
deductibility thereof, for federal income tax purposes, under
Section 404 of the Code. If and to the extent that such
deduction is disallowed, the Company's contribution (to the
extent disallowed) may be returned, at the discretion of the
Company, within one (1) year after the disallowance of the
deduction.
-13-
<PAGE> 64
11.13 In the event any controversy or disagreement shall arise as to the
person or persons to whom payment or delivery of any funds or property
shall be made by the Trustee, the Trustee may, without liability,
retain the funds or property involved pending settlement of the
controversy or disagreement or pending an adjudication by a court of
competent jurisdiction. The Trustee shall not be liable for the
payment of any interest or income on the cash or other property held
by the Trustee under such circumstances.
11.14 The Trustee may consult with legal counsel (who may be counsel for the
Employer) with respect to the construction of this Trust Agreement or
the Trustee's duties hereunder, or with respect to any legal
proceedings or in any question of law, and shall have no liability
with respect to any action taken or omitted by the Trustee in good
faith pursuant to the advice of such counsel to the extent permitted
by law.
IN WITNESS WHEREOF, the Company by its duly authorized officers, has
caused this Agreement to be executed, and its corporate seal affixed, and the
Trustee has executed this Agreement, this 27th day of December, 1992.
MET HOLDINGS CORPORATION
By: /s/ DAVID SMILOW
----------------------------------------
Its President
TRUSTEE
/s/ THOMAS W. LEATON
- -------------------------------------------
Trustee
/s/ WILLIAM BEAUCHESNE
- -------------------------------------------
Trustee
/s/ DAVID SMILOW
- -------------------------------------------
Trustee
-14-
<PAGE> 1
EXHIBIT 10.13
CONVERSION AGREEMENT
This Conversion Agreement (the "Agreement") is made and entered into
as of this 15th day of May, 1998, by and among TeleBanc Financial Corporation,
a Delaware corporation ("Corporation") and each of the Investors set forth on
Schedule A hereto (each, an "Investor" and, collectively, the "Investors").
R E C I T A L S
WHEREAS, each of the Investors is the beneficial holder and owner of
record of the number of shares of Series A Voting Convertible Preferred Stock,
par value $.01 per share (the "Series A Preferred Stock"), Series B Nonvoting
Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock") and Series C Nonvoting Convertible Preferred Stock (the "Series C
Preferred Stock" and together with the Series A Preferred Stock and the Series
B Preferred Stock, the "Preferred Stock") of the Corporation set forth on
Schedule A hereto and issued to each such Investor pursuant to the terms of
that certain Unit Purchase Agreement dated as of February 19, 1997 among the
Corporation and the Investors (the "Unit Purchase Agreement");
WHEREAS, the Corporation is contemplating an underwritten public
offering (the "Public Offering") of shares of common stock, par value $.01 per
share (the "Common Stock") of the Corporation, for which BancAmerica Robertson
Stephens, CIBC Oppenheimer and Legg Mason Wood Walker (the "Underwriters") will
act as the Underwriters;
WHEREAS, the Corporation intends to file a registration statement on
Form S-2 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") to register the shares of Common Stock being sold
in the Public Offering for sale to the public; and
WHEREAS, the parties hereto wish to enter into this Agreement to set
forth their agreement with respect to the conversion of the outstanding shares
of Preferred Stock held by the Investor, without further action on the part of
the holder, at the date and time of consummation of the Public Offering, all
upon and subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter set forth and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by each of the parties
hereto, the parties hereto agree as follows:
<PAGE> 2
1. CONVERSION OF PREFERRED STOCK.
(a) CONVERSION OF THE SERIES C PREFERRED STOCK. Subject to
satisfaction of each of the conditions precedent set forth in Section 1(c) of
this Agreement, each of the Investors holding shares of Series C hereby agrees
to convert each of the outstanding shares of Series C Preferred Stock into the
number of fully paid and nonassessable shares of Series A Preferred Stock or
Series B Preferred pursuant to and in accordance with the Applicable Conversion
Rate (as defined in the TeleBanc Financial Corporation Certificate of
Designation of the Series A Preferred Stock and Series B Preferred Stock and
Series C Preferred Stock (the "Certificate of Designation") adopted on February
25, 1997) prior to the Effective Time (as hereinafter defined).
(b) CONVERSION OF THE SERIES A PREFERRED STOCK AND SERIES B
PREFERRED STOCK. Each of the Investors holding shares of Series A Preferred
Stock and Series B Preferred Stock at the date and time of the consummation of
the Public Offering (the "Effective Time"), hereby agrees that, at the
Effective Time, each of the outstanding shares of such series of Preferred
Stock will automatically and without any further action on the part of the
holder thereof, convert into the number of fully paid and nonassessable shares
of voting Common Stock of the Corporation pursuant to and in accordance with
the Applicable Conversion Rate (as defined in the Certificate of Designation).
(c) CONDITIONS PRECEDENT TO CONVERSION OF PREFERRED STOCK.
The conversion of the shares of Preferred Stock set forth in subsections (a)
and (b) of this Section 1 is expressly conditioned upon the satisfaction of the
following conditions:
(i) the Corporation shall declare and pay, prior to
or at the Effective Time, a dividend (payable in the form of shares of Common
Stock) on the Preferred Stock equal to five percent (5%) of the number of
shares issuable upon conversion of the Preferred Stock (the "Special
Dividend");
(ii) the Corporation shall consummate a public
offering on or before September 30, 1998, of not fewer than 1,000,000 shares of
Common Stock at a price per share to the public equal to or greater than $25.00
(the "Minimum Price") per share (a "Qualified Public Offering"); and
(iii) all of the Investors shall have executed and
delivered this Agreement.
(d) STOCK DIVIDEND. The parties hereto acknowledge and agree
that the Corporation intends to declare and to pay a 100% stock dividend on the
outstanding shares of Common Stock prior to the Effective Time. In the event
that such stock dividend on the Common Stock is declared and paid by the
Corporation prior to the Effective Time, the numbers of shares and per share
amounts of Common Stock as set forth in this Agreement shall be subject to
appropriate adjustment.
2
<PAGE> 3
2. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. As a material
inducement to each of the Investors to enter into this Agreement, the
Corporation represents and warrants to each Investor that each of the following
representations and warranties is true and correct as of the date hereof and as
of the Effective Time (to the same extent as if then made).
(a) AUTHORITY. The Corporation is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution, delivery
and performance of this Agreement by the Corporation has been duly authorized
by all necessary corporate action on the part of the Corporation. This
Agreement is a valid and legally binding obligation of the Corporation,
enforceable against it in accordance with its terms, except as limited by the
effect of bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the rights and remedies of creditors generally or by general
principles of equity (whether applied in a proceeding at law or in equity).
(b) DUE ISSUANCE OF COMMON STOCK. When issued pursuant to
the terms of this Agreement, the shares of Common Stock to be issued upon
conversion of the Preferred Stock and, if the Special Dividend is declared and
paid, the shares of Common Stock issued pursuant to such Special Dividend, will
be validly issued, fully paid and nonassessable, free and clear of any
restrictions on transfer (other than restrictions imposed by federal or state
securities laws and the lock-up agreement hereinafter set forth), claims,
taxes, security interests, options, warrants, rights, contracts, calls, or
commitments. The Corporation has taken all necessary corporate action to
reserve for issuance the number of shares of Common Stock issuable upon
conversion of the Preferred Stock and, prior to the Effective Time, will take
all necessary corporate action to authorize the payment of the Special
Dividend.
(c) NO VIOLATION OF LAWS OR AGREEMENTS. Neither the
execution and delivery of this Agreement by the Corporation, nor the
performance by it of its obligations hereunder, will (i) violate any statute,
regulation, rule, judgment, order, decree, stipulation, injunction, charge or
other restriction of any government, governmental agency or court to which the
Corporation is subject, (ii) violate any provision of the Amended and Restated
Certificate of Incorporation or Bylaws of the Corporation, (iii) conflict with
or result in a breach of, constitute a default under, result in the
acceleration of, or create in any person the right to accelerate, terminate,
modify or cancel, or require notice under any agreement or instrument to which
the Corporation is a party or by which the Corporation is bound, or (iv) result
in the creation or imposition of any lien, charge or encumbrance, security
interest or restriction with respect to the Corporation's assets.
3. REPRESENTATIONS AND WARRANTIES OF INVESTORS. As a material
inducement to each other Investor and to the Corporation to enter into this
Agreement, each of the Investors, severally but not jointly, represents and
warrants to each other Investor and to the Corporation that each of the
following representations and warranties is true and
3
<PAGE> 4
correct as of the date hereof and as of the Effective Time (to the same extent
as if then made).
(a) AUTHORITY. Each of the Investors represents and warrants
that it has full capacity and authority necessary to execute, deliver and
perform this Agreement and to perform its obligations hereunder. Each of the
Investors represents and warrants that it is duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it was formed
and has the power and authority to execute and deliver this Agreement, and to
perform its obligations hereunder. The execution, delivery and performance of
this Agreement by each of the Investors has been duly authorized by all
necessary corporate or partnership action on the part of such entity. This
Agreement is a valid and legally binding obligation of each of the Investors,
enforceable against each of them in accordance with its terms, except as
limited by the effect of bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the rights and remedies of creditors generally or
by general principles of equity (whether applied in a proceeding at law or in
equity).
(b) NO VIOLATION OF LAWS OR AGREEMENTS. Each Investor
represents and warrants that neither the execution and delivery of this
Agreement, nor the performance by such Investor of its obligations hereunder,
will (i) violate any statute, regulation, rule, judgment, order, decree,
stipulation, injunction, charge or other restriction of any government,
governmental agency or court to which such Investor is subject, or (ii)
conflict with or result in a breach of, constitute a default under, result in
the acceleration of, or create in any person the right to accelerate,
terminate, modify or cancel, or require notice under any agreement or
instrument to which such Investor is a party or by which such Investor or any
of its assets are bound.
(c) ACCREDITED INVESTOR. Each of the Investors hereby
certifies that it is an "accredited investor" within the meaning of Rule 501(a)
of Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). Each of the Investors represents and warrants that it is a
bona fide resident of the state or jurisdiction indicated in the address set
forth on Schedule A to this Agreement.
(d) INVESTMENT INTENT. Each of the Investors is acquiring
the shares of Common Stock issuable upon conversion of the Preferred Stock for
the purpose of investment and not with a view to, or for resale in connection
with, any distribution thereof in violation of the Securities Act. Each of the
Investors acknowledges that the shares of Common Stock to be received upon
conversion are not registered under the Securities Act or any applicable state
securities law, and that such Common Stock may not be transferred or sold
except pursuant to the registration provisions of such Securities Act or
pursuant to an applicable exemption therefrom and pursuant to state securities
laws and regulations as applicable, and that the certificate representing the
shares of Common Stock will bear appropriate legends to that effect.
4
<PAGE> 5
4. LOCK-UP AGREEMENT; WAIVER OF REGISTRATION RIGHTS, RIGHT OF FIRST
OFFER AND CERTAIN ADJUSTMENTS TO APPLICABLE CONVERSION VALUE. In order to
induce the Underwriters to enter into the Underwriting Agreement to be entered
into in connection with a Qualified Public Offering, each of the Investors
agrees that from the date hereof, and continuing for a period (the "Lock-Up
Period") of one-hundred and eighty (180) days from the date of closing of the
Qualified Public Offering, it will not, without the prior written consent of
the lead underwriter of the Qualified Public Offering, offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of the Corporation's Common Stock, or any
other securities of the Corporation convertible into, exercisable for, or
exchangeable for shares of Common Stock or other securities of the Corporation.
In addition, each of the Investors hereby waives (a) any registration rights to
which would be entitled during the Lock- Up Period under Section 13.01 of the
Unit Purchase Agreement, and (b) any rights of first offer (including but not
limited to any right to notice with respect thereto) under Article 14 of the
Unit Purchase Agreement in connection with the conversion of the Preferred
Stock contemplated in this Agreement or a Qualified Public Offering provided
that the price per share to the public in the Qualified Public Offering is
equal to or greater than the Minimum Price. The undersigned further agrees to
waive any right the undersigned might otherwise have to an adjustment to the
Applicable Conversion Value pursuant to Section 5(d)(i)(A) of the Certificate
of Designation as a result of the dividend to be declared and paid to the
undersigned pursuant to Section 1(c)(i) of this Agreement.
5. CONSENT TO PUBLIC OFFERING. Each of the Investors hereby consents
to the transactions contemplated in this Agreement and, to the extent required,
to the offer and sale of Common Stock of the Corporation in a Qualified Public
Offering under the Securities Act and the securities laws of various states.
6. FURTHER ASSURANCES; COOPERATION IN PUBLIC OFFERING. Each of the
parties agrees to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws, rules and regulations to consummate and make
effective the transactions contemplated by this Agreement.
7. MISCELLANEOUS.
(a) AMENDMENT. This Agreement may be amended or modified
only by a written instrument executed by the parties hereto.
(b) CONFIDENTIALITY. Each of the Investors acknowledges and
agrees that the information contained in this Agreement is confidential and
constitutes material inside information regarding the Corporation under the
Securities Act and applicable federal securities laws
5
<PAGE> 6
(c) GOVERNING LAW. This Agreement shall be construed,
interpreted and enforced in accordance with the laws of the State of Delaware,
without regard to its conflicts of laws principles.
(d) SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
(e) EXECUTION IN COUNTERPARTS. This Agreement may be
executed in any number of counterparts and by the different parties hereto on
separate counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the date first above written.
TELEBANC FINANCIAL CORPORATION
________________________________________
By: Mitchell Caplan
Its: President and Chief Executive
Officer
INVESTORS:
CONNING INSURANCE CAPITAL LIMITED
PARTNERSHIP III
By: Conning Investment Partners Limited
Partnership III, its General Partner
By: Conning & Company, its General Partner
________________________________________
By:
Its:
CONNING INSURANCE CAPITAL
INTERNATIONAL PARTNERS III, L.P.
By: Conning Investment Partners Limited
Partnership III, its General Partner
By: Conning & Company, its General Partner
________________________________________
By:
Its:
7
<PAGE> 8
GENERAL AMERICAN LIFE INSURANCE COMPANY
________________________________________
By:
Its:
CIBC WG ARGOSY MERCHANT FUND 2, LLC
________________________________________
By:
Its:
PC INVESTMENT COMPANY, INC
________________________________________
By:
Its:
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
________________________________________
By:
Its:
8
<PAGE> 9
' SCHEDULE A
PREFERRED STOCK HELD BY INVESTORS PRIOR TO CONVERSION
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF NUMBER OF SHARES OF
------------------- ------------------- -------------------
SERIES A PREFERRED SERIES B PREFERRED SERIES C PREFERRED
------------------- ------------------- -------------------
NAME AND ADDRESS OF INVESTOR STOCK STOCK STOCK
---------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Conning Insurance Capital Limited 4,719 1,414
Partnership III
c/o Conning & Company
City Place II
185 Asylum Street
Hartford, CT 06103
Attn: Steven F. Piaker
Conning Insurance Capital 667 200
International Partners III, L.P
c/o Conning & Company
City Place II
185 Asylum Street
Hartford, CT 06103
Attn: Steven F. Piaker
General American Life Insurance 1,539 461
Company
700 Market Street
St. Louis, MO 63101
Attn: David Kaslow
PC Investment Company 6,925 1,975
401 Theodore Fremd Avenue
Rye, NY 10580
Attn: David W. Young
CIBC WG Merchant Funds 2 7,000
LLC
425 Lexington Avenue
3rd Floor
New York, NY 10017
Attn: Dean Kehler
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF NUMBER OF SHARES OF
------------------- ------------------- -------------------
SERIES A PREFERRED SERIES B PREFERRED SERIES C PREFERRED
------------------- ------------------- -------------------
NAME AND ADDRESS OF INVESTOR STOCK STOCK STOCK
---------------------------- ------------------- ------------------- -------------------
<S> <C>
Northwestern Mutual Life 5,000
Insurance Company
720 East Wisconsin Avenue
Milwaukee, WI 53202
Attn: Linda A. Gorens
</TABLE>
10
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION/ORGANIZATION
------------------ ------------------------------------------
<S> <C>
TeleBank United States
TeleBanc Capital Markets, Inc. Delaware, United States
TeleBanc Capital Trust I Delaware, United States
TeleBanc Capital Trust II Delaware, United States
TeleBanc Insurance Services, Inc. Delaware, United States
TeleBanc Servicing Corporation Virginia, United States
AGT Mortgage Services, LLC Delaware, United States
AGT-PRA, LLC Delaware, United States
</TABLE>
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
Washington, DC
June 22, 1998
