<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1998
REGISTRATION NO. 333-52871
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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(1) PER SHARE OFFERING PRICE REGISTRATION FEE(2)
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Common stock, par value $.01 per
share............................ 4,715,000 $14.50 $68,367,500 $20,169
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(1) Includes 615,000 shares of Common Stock to cover over-allotments, if any.
(2) 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 $17,538 of this fee and in accordance with Rule 457(a) the
remainder of $2,631 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 $27.5 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 JULY , 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 July 17, 1998, the last
reported sale price of the Common Stock was $19.00 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") $27.5 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.................. $ $ $
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Total(3)................... $ $ $
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</TABLE>
(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 July , 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 TELEBANK'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
TELEBANK. 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 TELEBANK'S LOGO; IN THE THIRD COLUMN ARE THE
VARIOUS ALTERNATIVE DELIVERY CHANNELS THROUGH WHICH CUSTOMERS CAN ACCESS
TELEBANK'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
TELEBANK'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.
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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 $6.0 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. The DFC Acquisition is
expected to be completed in the summer of 1998, subject to satisfaction of
certain customary conditions. 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 on June 22, 1998 to holders of record of the
Common Stock as of June 11, 1998, 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 $4.0
trillion and the total assets of such institutions were more than $6.0 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
Offering(1)...................................... 11,114,448 shares
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."
Nasdaq National Market Symbol...................... TBFC
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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,
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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) 835,402 shares of Common Stock issuable
upon the exercise of options granted to other employees of the Company with
a weighted average exercise price of $6.87 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
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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, 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 12.9%, 6.8%, 3.8% and 25.6%,
respectively, of the outstanding Common Stock (approximately 12.3%, 6.4%, 3.6%
and 24.4%, 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 4,856,234 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 1,630,196 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
"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
certain provisions 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 TeleBanc Financial. 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 $27.5 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 1,630,196 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 July 17, 1998, the last reported sale price of the Common Stock in the
over-the-counter market was $19.00 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 notice of issuance, the Common Stock will be quoted 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> <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..................................................... 14.000 9.875
Third Quarter (through July 17, 1998).............................. 19.750 14.000
</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 35,919
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, 4,484,988 and 7,014,448 shares issued and
outstanding actual and pro forma; 11,114,448 shares
issued and outstanding, pro forma, as adjusted......... 44 70 110
Additional paid-in capital............................... 16,387 33,362 84,172
Retained earnings........................................ 11,828 10,208 10,208
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 $163,081
======== ======= ========
</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 1,630,196 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 $105.2 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 the
satisfaction of certain customary conditions. 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
---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<CAPTION>
(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
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------
MET HOLDINGS
AND DFC
COMPANY COMBINED PRO FORMA
HISTORICAL HISTORICAL(a) ADJUSTMENT PRO FORMA
----------- ------------- ---------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<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(1)................... -- -- -- -- 546 60 162
--------- --------- --------- --------- --------- --------- ---------
Net income available to common
stockholders(1)............................. $ 1,377 $ 540 $ 2,720 $ 2,552 $ 3,671 $ 814 $ 274
========= ========= ========= ========= ========= ========= =========
Earnings per share:(1)
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(2)................... 80,782 236,464 234,385 184,743 319,203 260,152
Investment securities(2)........................ 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(3)................... -- -- -- -- 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%(4) 0.45% 0.11%
Return on average stockholders' equity.......... 11.79% 3.17% 14.10% 16.50%(4) 9.17% 2.58%
SG&A expenses to total assets................... 1.36% 0.82% 1.00% 1.03%(4) 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) In connection with the Preferred Stock Conversion, the Company will record,
immediately prior to the consummation of the Offering, a nonrecurring,
noncash charge related to the additional Preferred Stock dividend payable in
Common Stock, based on the fair market value of the Common Stock at the time
such dividend is paid, estimated to be approximately $2.0 million. The
charge will reduce net income available to common stockholders by the same
amount and earnings per share in the third quarter of 1998.
(2) Includes available-for-sale, held-to-maturity, held-for-sale, and trading.
(3) 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.
(4) 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. 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
$984,000 decrease in investment securities available for sale and a $624,000
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>
In connection with the Preferred Stock Conversion, the Company will record,
immediately prior to the consummation of the Offering, a nonrecurring, noncash
charge related to the additional Preferred Stock dividend payable in Common
Stock, based on the fair market value of the Common Stock at the time such
dividend is paid, estimated to be approximately $2.0 million. The charge will
reduce net income available to common stockholders by the same amount and
earnings per share in the third quarter of 1998.
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
$58.9 million of loans sold in 1997. During 1996, the Company recorded whole
loan purchases of $181.0 million, offset in part by $50.6 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.
23
<PAGE> 26
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.
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
------------ -------- -------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS) (UNAUDITED)
<CAPTION>
<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.
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.
25
<PAGE> 28
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
------- -------- -------- ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (UNAUDITED)
<CAPTION>
<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)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<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
(IN THOUSANDS) INC./EXP. YIELD/COST
--------- ----------
(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 $4.0 trillion and the total
assets of such institutions were more than $6.0 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, during June 1997, the average time that an existing or
prospective customer waited to speak with a TeleBanker on the telephone was
approximately 16 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 July 15, 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 July 15, 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 July 15, 1998, CD rates ranged from 5.67% apy for a
three-month CD to 6.60% 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 JULY 15, 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% 2.54%
Money Market Savings........................................ 5.35% 3.02%
One year Certificate of Deposit............................. 5.74% 5.08%
Five year Certificate of Deposit............................ 6.00% 5.40%
</TABLE>
- ---------------
(1) Source: Bank Rate Monitor, July 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 June 1998, the average customer call to the
Company was answered in person by a TeleBanker within 16 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 2%. 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
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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 $25,000 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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<PAGE> 42
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 TeleBanc Insurance
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
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<PAGE> 43
would be an effective 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 83.7% 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 the 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 the
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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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 June 30, 1998, the Company had 72 full-time employees, and 12 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.................... 41 Vice Chairman of the Board of
Directors, Chief Executive Officer and
President
Aileen Lopez Pugh..................... 31 Executive Vice President, Chief
Financial Officer
Laurence Greenberg.................... 36 Executive Vice President, Chief
Marketing Officer
Michael Opsahl........................ 34 Executive Vice President, Chief Credit
Officer
Sang-Hee Yi........................... 34 Executive Vice President, Chief
Operating Officer
Ross C. Atkinson...................... 30 Executive Vice President, Chief
Information Officer
Arlen W. Gelbard...................... 40 Executive Vice President, General
Counsel
Stephen G. Dervenis................... 33 Executive Vice President
David R. DeCamp....................... 40 Director
Dean C. Kehler........................ 41 Director
Marcia Myerberg....................... 53 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,
47
<PAGE> 50
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.
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.
Ross C. Atkinson has served as Executive Vice President and Chief
Information Officer of TeleBanc Financial and TeleBank since June 1998,
responsible for the strategic direction of all information processing,
communication systems and operations. From 1997 until June 1998, Mr. Atkinson
served as a principal consultant with Platinum Technology, Inc., a database
systems and information management software provider. From 1991 through 1996,
Mr. Atkinson served as a systems engineer for Electronic Data Systems.
Arlen W. Gelbard has served as Executive Vice President and General Counsel
of TeleBanc Financial and TeleBank since June 1998. From 1982 until June 1998,
Mr. Gelbard was a member of the law firm of Hofheimer Gartlir & Gross, LLP, New
York, New York, where he specialized in transactional real estate, lending,
leasing, foreclosures and workouts. Prior to joining management of the Company,
from April 1996 to June 1998, Mr. Gelbard served as a director, as well as
Chairman of the Compensation Committees, of TeleBanc Financial and TeleBank.
Stephen G. Dervenis has served as Executive Vice President of TeleBanc
Financial, as well as Chief Executive Officer of TCM since June 1998. From
October 1997 to June 1998, Mr. Dervenis served as Director of Amortizing and
Emerging Assets Securitization at Barclays Capital in New York. From April 1994
to September 1997, Mr. Dervenis served as a Managing Director of Furman Selz,
and from January 1993 to March 1994, as a Vice President at J.P. Morgan, both in
New York.
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.
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.
Marcia Myerberg has served as a director of TeleBanc Financial and TeleBank
since May 1998. Ms. Myerberg has been Chief Executive Officer of Myerberg &
Company, L.P., an investment banking firm specializing in the mortgage-backed
securities markets, since February 1994. Prior to her current position from
March 1989 to February 1994, Ms. Myerberg was a Senior Managing Director of The
Bears Stearns Companies, Inc. From July 1985 to February 1989, she was a
Director of Salomon Brothers Inc. and from November 1979 to June 1989 she was
the Senior Vice President-Corporate and Treasurer of Federal Home Loan Mortgage
Corporation.
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.
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<PAGE> 51
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."
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 and the 1998
Stock Incentive 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................ 30,000 40,000 151,750(3) 160,125(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 125,490 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 1,000,000 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 Stock Option 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 upon surrender to the Company,
unexercised, of that portion of the option to which the SAR relates. As of
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<PAGE> 54
July 16, 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 certain
performance objectives, the shares subject to such Stock Award shall become
nonforfeitable and transferable only to the extent that the Stock Option
Committee certifies that such objectives have been
52
<PAGE> 55
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.
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
53
<PAGE> 56
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 and are
outstanding as of July 16, 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
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<PAGE> 57
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 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
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<PAGE> 58
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 879,460
shares of Common Stock are reserved for issuance, and currently 808,460 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 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.
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<PAGE> 59
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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<PAGE> 60
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)....................... 1,479,612 20.2% -- 1,479,612 12.9%
Mitchell H. Caplan(4).................... 772,446 10.5 -- 772,446 6.8
Aileen Lopez Pugh(5)..................... 84,706 1.2 -- 84,706 *
David R. DeCamp(6)....................... 20,000 * -- 20,000 *
Dean C. Kehler(7)........................ 682,590 9.6 -- 682,590 6.1
Marcia Myerberg.......................... -- -- -- -- --
Steven F. Piaker(8)...................... -- -- -- -- --
Mark Rollinson(9)........................ 19,000 * -- 19,000 *
CIBC WG Argosy Merchant Fund 2 LLC(7).... 682,590 9.6 -- 682,590 6.1
Conning & Company(10).................... 682,589 9.6 -- 682,589 6.1
General American Mutual Holding
Company(11)............................ 877,614 12.3 -- 877,614 7.8
PC Investment Company(12)................ 867,863 12.2 -- 867,863 7.7
The Northwestern Mutual Life Insurance
Company(13)............................ 487,563 6.9 -- 487,563 4.4
TeleBanc Employee Stock Ownership
Plan(14)............................... 422,838 6.0 -- 422,838 3.8
Directors and executive officers, as a
group (8 individuals)(15).............. 3,058,354 38.9% -- 3,058,354 25.6%
</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 28,472 shares of Common Stock held
by the ESOP and allocated to Mr. Smilow's account. Excludes 344,366 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 8,978 shares of Common Stock held
by the ESOP and allocated to Mr. Caplan's account. Excludes 363,860 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 warrants
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 2,106 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) 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 upon
the Preferred Stock Conversion and 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.
(8) 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.
(9) 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.
(10) 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 are convertible into an aggregate of 492,175 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 are
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.
(11) 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 are convertible into an aggregate of 160,500 shares of Common
Stock issuable upon the Preferred Stock Conversion and 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.
(12) PC Investment Company holds 6,925 shares of Series A Preferred Stock and
1,975 shares of Series B Preferred Stock which are convertible into an
aggregate of 714,226 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.
(13) The Northwestern Mutual Life Insurance Company ("Northwestern Mutual")
holds 5,000 shares of Series A Preferred Stock which is convertible into
401,250 shares of Common Stock upon the Preferred Stock Conversion and
66,250 shares of Common Stock issuable upon exercise of warrants
exercisable within 60 days of the date of this Prospectus. The address of
Northwestern Mutual is 702 East Wisconsin Avenue, Milwaukee, Wisconsin
53202.
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(14) Includes 50,000 shares of Common Stock issuable upon exercise of warrants
exercisable within 60 days of the date of this Prospectus.
(15) Includes 636,794 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 333,282
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
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
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<PAGE> 64
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. In connection with the Preferred Stock
Conversion, the Company will record, immediately prior to the consummation of
the Offering, a nonrecurring, noncash charge related to the additional Preferred
Stock dividend payable in Common Stock, based on the fair market value of the
Common Stock at the time such dividend is paid, estimated to be approximately
$2.0 million. The charge will reduce net income available to common stockholders
by the same amount and earnings per share in the third quarter of 1998.
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 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 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
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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 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, 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 in a
private placement, at par, 10,000 shares of Capital Securities, Series A,
liquidation amount of $1,000, for a total of $10,000,000. 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,
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although no interest can be deferred beyond the maturity date. The TCT I Junior
Subordinated Debentures 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 $27.5 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 special meeting of stockholders to vote on the proposal. It also provides
for appraisal rights for dissenting
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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 4,856,234 shares of Common Stock, options to purchase
1,155,794 and warrants to purchase 571,276 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.
The National Association of Securities Dealers, Inc. ("NASD") Conduct Rules
(the "NASD Conduct Rules") require, in certain circumstances, employees of TCM,
their spouses and other members of their immediate families and senior officers
of TeleBank or any other person involved in the buying and selling of securities
on behalf of TeleBank, who purchase any Common Stock offered hereby to agree not
to sell, pledge, assign, hypothecate or transfer such shares for a period of
three or five months following the date of this Prospectus.
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
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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 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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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 NASD Conduct Rules.
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 NASD Conduct Rules require, in certain circumstances, employees of TCM,
their spouses and other members of their immediate families and senior officers
of TeleBank or any other person involved in buying and selling of securities on
behalf of TeleBank, who purchase any Common Stock offered hereby to agree not to
sell, pledge, assign, hypothecate or transfer such shares for a period of three
or five months following the date of this Prospectus.
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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.
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.
The Underwriters have reserved for possible sale, at the public offering
price, an aggregate of 205,000 shares of Common Stock offered hereby for certain
individuals approved by the Company, including employees and directors of the
Company, and who have expressed an interest in purchasing shares of Common Stock
in this Offering. The number of shares available for sale to the general public
will be reduced to the extent any such persons are offered and purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby. The Representatives are aware of the "Free-Riding and Withholding" rule
of the NASD Conduct Rules in connection with the sale of certain
"issuer-directed" securities and will comply with such rules.
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
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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 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.
71
<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......................................... 40 44
Additional paid-in-capital.................................. 14,637 16,205
Retained earnings........................................... 7,885 11,556
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........... $-- $40 $14,637 $2,613 $(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........... -- 40 14,637 5,333 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........... -- 40 14,637 7,885 2,096 24,658
Net income.............................. -- -- -- 4,217 -- 4,217
Common stock issued..................... -- 4 1,568 -- -- 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 $44 $16,205 $11,556 $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, PC
Investment Company, and The Northwestern Mutual Life Insurance Company. Upon the
sale
F-19
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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........................................... 40 44
Additional Paid-in-Capital............................. 14,637 16,205
Retained earnings...................................... 7,885 11,556
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
------------ ----------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
<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............................ 44 44
Additional paid-in-capital.................................. 16,205 16,385
Retained earnings........................................... 11,556 11,830
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
------- -------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
<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..... $ -- $40 $14,637 $ 7,885 $ 2,096 $24,658
Net income for the three months
ended March 31, 1997............ -- -- -- 874 -- 874
Stock issued...................... -- 4 1,270 -- -- 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 $44 $15,907 $ 8,699 $ 931 $40,862
======= === ======= ======= ======= =======
Balances at December 31, 1997..... $15,281 $44 $16,205 $11,556 $ 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 $44 $16,385 $11,830 $ 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 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 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
[TELEBANK LOGO]
<PAGE> 113
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 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> 114
<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
(amended pursuant to the First Amendment to Agreement and
Plan of Merger dated May 29, 1998 and filed as Exhibit 10.14
hereto)
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> 115
<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
10.14 First Amendment to Agreement and Plan of Merger (filed as
Exhibit 10.5 hereto) by and among the Registrant, Direct
Financial Corporation and TBK Acquisition Corp., dated May
29, 1998
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
II-3
<PAGE> 116
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.
(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> 117
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 22nd day of
July, 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 July 22, 1998
/s/ MITCHELL H. CAPLAN* Vice Chairman of the Board, Chief
- ------------------------------------------ Executive Officer and President
MITCHELL H. CAPLAN (principal executive officer) July 22, 1998
/s/ AILEEN LOPEZ PUGH Executive Vice President and Chief
- ------------------------------------------ Financial Officer (principal
AILEEN LOPEZ PUGH financial and accounting officer) July 22, 1998
/s/ DAVID DECAMP* Director
- ------------------------------------------
DAVID DECAMP July 22, 1998
/s/ DEAN C. KEHLER* Director
- ------------------------------------------
DEAN C. KEHLER July 22, 1998
Director
- ------------------------------------------
MARCIA MYERBERG July 22, 1998
/s/ STEVEN F. PIAKER* Director
- ------------------------------------------
STEVEN F. PIAKER July 22, 1998
/s/ MARK ROLLINSON* Director
- ------------------------------------------
MARK ROLLINSON July 22, 1998
* By: /s/ AILEEN LOPEZ PUGH
------------------------------------
AILEEN LOPEZ PUGH
PURSUANT TO POWER OF ATTORNEY
</TABLE>
II-5
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1 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
(amended pursuant to the First Amendment to Agreement and
Plan of Merger dated May 29, 1998 and filed as Exhibit 10.14
hereto)
</TABLE>
<PAGE> 119
<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
10.14 First Amendment to Agreement and Plan of Merger (filed as
Exhibit 10.5 hereto) by and among the Registrant, Direct
Financial Corporation and TBK Acquisition Corp., dated May
29, 1998
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.
<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 each an "Underwriter") and hereby confirms 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 "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,
1
<PAGE> 2
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.
2. Representations, Warranties and Agreements of the Company. 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), (3), (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
2
<PAGE> 3
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) 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 effectiveness of the Registration Statement or
instituted proceedings for that purpose. As of its date, each such Preliminary
Prospectus has conformed in all material respects to the requirements of the
Act and the Rules and Regulations and 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
3
<PAGE> 4
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, in light of the
circumstances under which they were made, 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 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 the 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 State of Delaware with all
requisite 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 financial condition, earnings, operations,
assets or business of the Company and its Subsidiaries (as defined below) taken
as a whole (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 and each Subsidiary is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities, all of which are valid and in full force and effect, except where
such failure to possess, operate in compliance with, or maintain such
authorizations, licenses, certificates, consents, orders and permits would not
have a Material Adverse Effect; neither the Company nor any Subsidiary is in
violation of its charter or bylaws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
bond, debenture, note or other evidence of indebtedness, or in any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or the Subsidiary is a party
or by which it or its respective properties may be bound, except where the
failure to so comply would not have a Material Adverse Effect; and neither the
Company nor any Subsidiary is in 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
the Subsidiary or over their respective properties which violation could be
reasonably expected to have a Material Adverse Effect. 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, TBK
Acquisition Corp. ("Acquisition Corp."), AGT Mortgage Services, LLC (which is
inactive), AG Arbor Management, L.L.C., and AGT PRA LLC (the entities referred
to in this Section 2(c)(i) may each be referred to hereinafter individually as
a "Subsidiary" and collectively as "Subsidiaries").
4
<PAGE> 5
Notwithstanding the fact that AGT Mortgage Services, LLC, AG Arbor Management,
LLC and AGT PRA LLC (collectively, the "Excepted Entities") are included within
the definition of "Subsidiaries" hereunder, the Underwriters hereby acknowledge
the assertion of the Company that, because it does not, directly or indirectly,
beneficially own more than 50% of the outstanding membership or other interests
of any of such Excepted Entities, the Company does not control the Excepted
Entities.
(ii) The Company is a registered savings and loan holding company under the
Home Owners' Loan Act ("HOLA").
(iii) Each Subsidiary has been duly incorporated or formed, as applicable, and
is validly existing as a corporation, limited liability company or business
trust, as applicable, in good standing under the laws of the State of Delaware,
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), except to the extent that AGT Mortgage
Services, LLC has adopted a unanimous written consent to cease operations in
July 1997, and is duly qualified as a foreign corporation, limited liability
company or business trust, as applicable, to transact business and is in good
standing in each jurisdiction 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 would not have 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,
except to the extent that AGT Mortgage Services, LLC has adopted a unanimous
written consent to cease operations in July 1997; the activities of the
Subsidiaries of TeleBank are permitted to subsidiaries of a federally chartered
savings bank under applicable law, including 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; all of the common interests of each Subsidiary
that is a business trust have been duly authorized and validly issued, and are
fully paid and nonassessable and are owned by the Company; all of the
outstanding membership or other interests of each Subsidiary that is a limited
liability company have been duly authorized and validly issued and are fully
paid and nonassessable, and the Company, through other Subsidiaries, owns 50%
of the outstanding membership or other interests of each Subsidiary that is a
limited liability company; all of the issued and outstanding capital stock or
membership or other interests, as the case may be, of each Subsidiary owned by
the Company, directly or through other Subsidiaries, is or are free and clear
of any and all pledges, liens, security interests, encumbrances, claims and
equitable interests (collectively, "Liens"); other than the Company's ownership
interests in the Subsidiaries, any Subsidiary's ownership of another
Subsidiary, and the Company's indirect ownership of membership interests in
Portfolio Recovery Associates, L.L.C., a Delaware limited liability company,
the Company does not own, directly or through Subsidiaries, more than one-half
of 1% of the outstanding capital, membership or other interests of any
corporation, limited liability company, trust, limited partnership, association
or other organization; and neither the Company nor any Subsidiary is a partner
in any general partnership, a party to any joint venture or a general partner
5
<PAGE> 6
in any limited partnership.
(d) The Company has all requisite 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 by the Company will not result in a 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 of any Subsidiary, 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 properties if any
such breach or violation would result in a Material Adverse Effect. 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 over its 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 or the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
all of which requirements have been satisfied in all material respects, or
under state or other securities laws.
(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 directors, 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 directors, officers or properties or otherwise which, if
adversely determined, (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 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
6
<PAGE> 7
for or purchase securities, and the Company's authorized and outstanding
capital stock is as set forth in the Prospectus under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to this
Agreement, reservations, agreements or employee benefit plans referred to in
the Prospectus, and the exercise of convertible securities, warrants and
options referred to in the Prospectus) and conforms in all material respects to
the statements relating thereto contained in the Registration Statement and the
Prospectus (and such statements fairly reflect in all material respects 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. 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
state or other securities 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 or any such options, warrants,
rights, convertible securities or obligations. The description of the Company's
stock option 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, as amended on May 29, 1998, with Direct Financial
Corporation, a New Jersey corporation ("Direct"), and Acquisition Corp., which
provides for, among other things, the Company's acquisition of Direct through
(a) the merger of Acquisition Corp. with and into Direct, with Direct being the
surviving corporation, and (b) immediately upon consummation of such merger,
the merger of Direct's wholly owned subsidiary Premium Bank, F.S.B.
("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,
Acquisition Corp., nor, to the Company's knowledge, 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) None of the 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, including those set forth in Article V of
the Merger Agreement, have been waived by either the Company or Direct, and
currently the Company has no expectation or reasonable basis to expect that
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<PAGE> 8
any such waiver will be necessary to effect such mergers, as contemplated by
the Merger Agreement.
(h) Arthur Anderson LLP, which has examined the consolidated financial
statements of the Company, 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, 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 statements 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 public accountants
within the meaning of the Act and the Rules and Regulations; the audited
consolidated financial statements of the Company together with the related
schedules and notes, and the unaudited consolidated financial information
regarding the Company, 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 consolidated financial
position and the results of operations of the Company 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 unaudited consolidated financial information
regarding the Company, 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. (For purposes of this subparagraph (h), all
references to the Company shall be deemed to include the Subsidiaries.) 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) Since March 31, 1998, or such later dates as of which information is given
in the Registration Statement and the Prospectus, except as otherwise disclosed
in the Prospectus, there has not been (i) any material adverse change in the
financial condition, earnings, operations or business of the Company, (ii) any
transaction in respect of the Company or any Subsidiary that is material to the
Company except transactions entered into in the ordinary course of business and
the obligations associated with the Company's issuance of TCT II Junior
Subordinated Debentures (as defined in the Registration Statement and
Prospectus), as disclosed in the registration statement on Form S-2 (File No.
333-53689) as filed with the Commission to register capital securities, Series
A, to be issued by TeleBanc Capital Trust II, (iii) 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, (iv)
any change in the capital stock or outstanding indebtedness of the Company or
any Subsidiary that is material to the Company, (v) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, other than the 100% stock dividend paid on June 22, 1998 to holders of
record as of June 11, 1998 of Common Stock or the special dividend paid or
payable in Common Stock to the holders of preferred stock of the Company
immediately prior to the public offering of the Firm Shares, or, (vi) any loss
or damage (whether or not insured)
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<PAGE> 9
to the property of the Company or any Subsidiary 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 capital lease
obligations, purchase money security interests and other Liens that 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 Company's knowledge, the other contracting
party or parties thereto are not in breach or default under any of such
agreements to the extent such breach or default would entitle the Company to
terminate any of the 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.
(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 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 in accordance
with generally accepted accounting principles.
(l) Each of the Company and the Subsidiaries maintains insurance of the types,
coverage and in the amounts generally 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 except where the failure to
maintain such insurance would not have a Material Adverse Effect.
(m) To the Company's knowledge, no labor disturbance by the employees of the
Company or any Subsidiary exists or is imminent. No collective bargaining
agreement exists with any of the employees of the Company or any Subsidiary
and, to the Company's knowledge, no such agreement is imminent.
(n) Except as disclosed in the Prospectus, the Company and each Subsidiary owns
or possesses
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<PAGE> 10
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 its business 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) Upon the effectiveness of the Company's registration statement on Form 8-A
(File No. 000-24569) under the Exchange Act, the Common Stock (i) will be
registered pursuant to Section 12(g) of the Exchange Act, and (ii) 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.
(p) The Company 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 Investment Company Act of 1940, as amended (the "1940
Act"), and the rules and regulations thereunder.
(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 (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, prior
to the termination of the underwriting syndicate contemplated by this Agreement
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.
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<PAGE> 11
(t) The Company, each director and executive officer of the Company and
stockholders listed on Exhibit 2(t) hereto have 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 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 ("Underwriters' Counsel") 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, except as would not result in a
Material Adverse Effect, 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 other third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus and is not disclosed therein, (iii) to the
Company's knowledge, there are no events or circumstances that might reasonably
be expected to form the basis of an order to clean-up or remediation, or any
action, suit or proceeding by any private party or governmental body or agency,
against or affecting the Company or any Subsidiary relating to any
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.
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(v) The Company and the Subsidiaries, except to the extent that AGT Mortgage
Services, LLC has ceased doing business, maintain, in all material respects,
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.
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
immediately available 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., Pacific 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., Pacific 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,
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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 funds 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.
On the basis of the representations, warranties and agreements of the Company
contained in, and subject to the terms and conditions of this Agreement, the
policies of the NASD, and pursuant to directions from the Company, the
Underwriters will offer to sell to each of the persons listed on Exhibit 3 (who
may purchase alone or with family members to the extent permitted by the
Free-Riding and Withholding Interpretation (the "Interpretation") under the
Rules of Fair Practice of the NASD) the number of Shares set forth opposite
their respective names on Exhibit 3, all at the above-mentioned public offering
price. Notwithstanding anything herein to the contrary, up to a maximum of
205,000 Shares will be sold under this paragraph. The Company and the
Underwriters agree that the securities purchased and sold under this paragraph
shall constitute "issuer directed securities" sold to the Company's employees or
directors or other persons under the Interpretation.
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, in
the Prospectus and in the Registration Statement 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 becomes 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
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<PAGE> 14
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), as applicable, 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 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
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, or deemed to be necessary by Shaw Pittman Potts & Trowbridge,
counsel to the Company or by Underwriter's Counsel 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 the Company will promptly use
every reasonable effort to prevent the issuance of any stop order or to obtain
its withdrawal at the earliest possible time if such stop order should be
issued.
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(c) The Company will use every reasonable effort, in cooperation with the
Underwriters, 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 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 file with the Commission and make available to stockholders within the
time periods required under the Exchange Act and the rules and regulations
promulgated thereunder, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports,
including unaudited interim financial statements, 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 to the
Company's stockholders (which shall be within 120 days after the end of the
respective fiscal year), such annual reports, including 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, (ii) within 55 days after the end of
each of the first three quarters of each fiscal year, such quarterly reports,
including statements of operations of the Company, (iii) concurrently with
furnishing to its stockholders, copies of all other reports (financial or
other) mailed to stockholders, (iv) within 10 business days of such furnishing
or filing, copies of
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<PAGE> 16
all other 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) within 10 business days of the
particular request, 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, 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.
(h) From the Closing Date, and until three years from the date that the
Registration Statement became effective, 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 1998 Stock Incentive Plan, 1997 Stock
Option Plan, 1994 Stock Option Plan and Employee Stock Ownership 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
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and Prospectus), and the Company's issuance of the TCT II Junior Subordinated
Debentures.
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 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,
and the cost of all certificates representing the Shares and transfer agent's
and registrar's 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 state securities law 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 30 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
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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
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 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., Pacific 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
reasonable 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 6.
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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, or development
involving a prospective change, which in your sole judgment could be reasonably
expected to have a Material Adverse Effect, not set forth in the Registration
Statement or Prospectus 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 (other than the Excepted Entities)
are each validly existing as a corporation, limited liability company or
business trust, as applicable, in good standing under the laws of the
jurisdiction of their respective incorporation or formation;
(ii) The Company and each Subsidiary (other than the Excepted
Entities) 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 (other than the Excepted
Entities) 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
the knowledge of Shaw Pittman Potts & Trowbridge, 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 the
knowledge of Shaw Pittman Potts & Trowbridge, 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 (other
than the Excepted Entities) 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, based on
such counsel's review of the records of the Subsidiaries and of the Company, is
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 accurate in all material respects; and the form of certificate
evidencing the Common Stock and filed as an exhibit to the Registration
Statement complies with Delaware law in all material respects;
(xii) The description in the Registration Statement and the Prospectus
of the Company's amended and restated certificate of incorporation, including
certificates of designations, and bylaws is accurate in all material respects
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
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 amended and
restated certificate of incorporation, 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 the Exchange Act or such as may be required under state or other
securities laws in connection with the purchase and the distribution of the
Shares by the Underwriters (as to which such counsel need not 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 (other than the Excepted Entities) is currently (a) in violation of
its respective certificate of incorporation or other charter documents,
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 any Subsidiary, 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
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and the
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<PAGE> 22
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.
In addition, such counsel shall state that such counsel has
participated in preparation of the Registration Statement and Prospectus 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 post-effective 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, in light of the
circumstances under which they were made, 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 reasonably requested for the
purpose of enabling them to pass upon such matters.
(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
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<PAGE> 23
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, or development involving
a prospective change, which in your sole judgment could be reasonably expected
to have a Material Adverse Effect, not set forth in the Registration Statement
or Prospectus, 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) confirm, to the extent true,
that they are independent 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 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.
(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
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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
post-effective 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 post-effective 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 sustained which has a Material Adverse Effect.
(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
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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 immediately available
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
(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 funds shall not have been received by you prior to the date of payment and
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<PAGE> 26
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 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
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<PAGE> 27
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 misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(b) 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(b) 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
27
<PAGE> 28
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 in the 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 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 the underwriting discount bears to the initial public offering price
hereunder, and the Company is 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
28
<PAGE> 29
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(d) 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 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 at the Closing Date to purchase 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 purchase 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 purchase 10% of the Firm Shares, the remaining Underwriters shall
have the right, but shall not be obligated, to purchase (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, purchase 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) reasonably
29
<PAGE> 30
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, then (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 purchase
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 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., Pacific time, on the first full business day following the effective date
of the Registration Statement, or (ii) the time of the public offering of any of
the Shares by the Underwriters after the Registration Statement becomes
effective. The time of the 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 facsimile,
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.
30
<PAGE> 31
(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, or
development involving a prospective change, which in your sole judgment could be
reasonably expected to have a Material Adverse Effect, not set forth in the
Registration Statement or Prospectus, and that makes it, in your sole judgment,
impractical or inadvisable to proceed with the public offering of the Shares, as
contemplated by the Prospectus, 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 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 or facsimile, 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 or facsimile, 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 faxed (and confirmed
by letter) to you c/o BancAmerica Robertson Stephens, 555 California Street,
Suite 2600, San Francisco, California 94104, facsimile 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, facsimile 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
faxed (and confirmed by letter) to TELEBANC
31
<PAGE> 32
FINANCIAL CORPORATION, at 1111 North Highland Street, Arlington, Virginia
22201, facsimile number (703) 524-0556, Attention: Aileen Lopez Pugh, with a
copy to Shaw Pittman Potts & Trowbridge, 1501 Farm Credit Drive, McLean,
Virginia 22102, facsimile number (703) 821-2397, 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, 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 laws of the State of New York, without regard to its
conflict of laws provisions.
15. Counterparts. This Agreement may be signed in several
counterparts, each of which will constitute an original.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
32
<PAGE> 33
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
33
<PAGE> 34
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
TO BE
UNDERWRITERS PURCHASED
- ---------------------------- -------------
<S> <S>
BANCAMERICA ROBERTSON STEPHENS
CIBC OPPENHEIMER CORP.
LEGG MASON WOOD WALKER, INCORPORATED
---------
Total . . . . . . . . . . . . . 4,100,000
=========
</TABLE>
34
<PAGE> 35
DRAFT 7/20/98
EXHIBIT 2(T)
PERSONS SUBJECT TO LOCK-UP PERIODS
1. Each of TeleBanc Financial Corporation's directors and executive
officers, including
a. David A. Smilow
b. Mitchell H. Caplan
c. David R. DeCamp
d. Arlen W. Gelbard
e. Dean C. Kehler
f. Steven F. Piaker
g. Mark Rollinson
h. Aileen Lopez Pugh
i. Laurence Greenberg
j. Michael Opsahl
k. Sang-Hee Yi
l. Marcia Myerberg
m. Stephen G. Dervenis
2. Lily Smilow
3. Michael Smilow
4. [Smilow Children]
5. Michael Linton
6. Cindy Mitchell
7. Caplan Associates
8. Caplan Trusts
9. CIBC WG Argosy Merchant Fund, LLC
10. Conning & Company
11. Conning Insurance Capital Limited Partnership III
12. Conning Insurance Capital International Partners III, L.P.
13. General American Life Insurance Company
14. General American Mutual Holding Company
15. PC Investment Company
35
<PAGE> 36
16. The Northwestern Mutual Life Insurance Company
17. TeleBanc Financial Corporation Employee Stock Ownership Plan
------------------------------------------------
36
<PAGE> 1
Exhibit 10.14
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment")
dated as of this 29th day of May, 1998, by and among TELEBANC FINANCIAL
CORPORATION, a Delaware corporation ("Parent"), TBK ACQUISITION CORP., a
Delaware corporation and a wholly-owned subsidiary of Parent ("Acquisition
Corp."), and DIRECT FINANCIAL CORPORATION, a New Jersey corporation (the
"Company"), recites and provides as follows:
RECITALS:
WHEREAS, pursuant to an Agreement and Plan of Merger dated January 14,
1998 (the "Merger Agreement"), by and between Parent and the Company, Parent
agreed to acquire the Company, and the Company agreed to be acquired by Parent,
by virtue of a merger whereby Parent would become the Surviving Institution;
WHEREAS, pursuant to Section 4.13 of the Merger Agreement, Parent, subject
to certain limitations, has the right to modify the structure of the
transactions contemplated in the Merger Agreement; and
WHEREAS, pursuant to this Amendment, Parent desires to (i) modify the
structure of the Merger whereby Acquisition Corp. would be merged with and into
the Company and the Company would be the Surviving Institution and (ii) effect
such other changes in the Merger Agreement consistent with the revised
structure.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
AGREEMENT:
SECTION 1. General Amendment. Except for the amendments set for in Section
2 below, all references in the Merger Agreement to "Acquiror" shall be deemed to
be and hereby are amended to read "Parent" and all references to "Subsidiaries"
shall be deemed to include Acquisition Corp.
SECTION 2. Amendment to Sections 1.1 and 1.2 of the Merger Agreement.
Sections 1.1 and 1.2 of the Merger Agreement are hereby deleted in their
entirety and restated as follows:
"1.1 Structure of Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.6 hereof),
Acquisition Corp. will merge with and into the Company (the "Merger"),
with the Company being the surviving institution (the "Surviving
Institution") pursuant to the provisions of, and with the effects
provided in, the Delaware General Corporation Law ("DGCL") and the New
Jersey Business Corporation Act ("NJBCA"). At the Effective Time, the
separate corporate existence of Acquisition Corp. shall cease, and the
Company shall continue as the Surviving Institution. The certificate of
1
<PAGE> 2
incorporation and bylaws, as in effect immediately prior to the Effective
Time, shall be the certificate of incorporation and bylaws of the
Surviving Institution until thereafter amended as provided by law. The
directors and officers of Acquisition Corp., immediately prior to the
Effective Time, shall be the directors and officers of the Surviving
Institution until thereafter such directors and officers resign or are
removed or their term of office expires.
1.2 Effect of the Merger on Outstanding Shares of Company Stock.
Subject to the terms and conditions of this Agreement, to effectuate, and
automatically by virtue of, the Merger:
(a) Common Stock. At the Effective Time, (i) each share of
common stock of the Company, par value $1.00 per share ("Company
Common Stock"), issued and outstanding immediately prior to the
Effective time (other than shares ("Excluded Shares") held directly
or indirectly by Parent or the Company or any of their respective
Subsidiaries, excluding shares held in a fiduciary capacity that are
beneficially owned by third parties or in satisfaction of a debt
previously contracted) ("Outstanding Common Shares") shall become and
be converted into the right to receive cash in the amount of $12.00
per share without interest (the "Per Share Merger Consideration") and
(ii) each outstanding share of Acquisition Corp. shall be converted,
on a one for one basis, into one share of the Surviving Institution
common stock, as such shares are constituted immediately prior to the
Effective Time.
(b) Preferred Stock. At the Effective Time, each share of Series
B 8.75% Cumulative Convertible Preferred Stock of the Company, par
value $1.00 per share ("Company Preferred Stock"), issued and
outstanding immediately prior to the Effective Time (other than
Excluded Shares) ("Outstanding Preferred Shares") shall become and be
converted into the right to receive cash in the amount of the Per
Share Merger Consideration multiplied by 2.1739.
(c) Excluded Shares. Each Excluded Share shall by virtue of the
Merger be canceled and retired and shall cease to exist, and no
exchange or payment shall be made therefor."
SECTION 3. Effectiveness. The amendments provided for by this Amendment
shall become effective upon the execution and delivery of this Amendment by each
of the parties hereto.
SECTION 4. Merger Agreement in Full Force and Effect as Amended. Except as
specifically amended hereby, all of the terms and conditions of the Merger
Agreement shall remain in full force and effect. All references to the Merger
Agreement in any other document or instrument shall be deemed to mean the Merger
Agreement as amended by this Amendment. This Amendment shall not constitute a
novation of the Merger Agreement, but shall constitute an
2
<PAGE> 3
amendment thereof.
SECTION 5. Counterparts. This Amendment may be executed in any number of
counterparts and by separate parties hereto on separate counterparts, each of
which when executed shall be deemed an original, but all such counterparts taken
together shall constitute one and the same instrument.
SECTION 6. Governing Law. This Amendment and the legal relations between
the parties hereto shall be governed by and construed in accordance with the
laws of the State of Delaware, without regard to the conflict of laws rule
thereof.
SECTION 7. Acquisition Corp. Acquisition Corp. has been formed solely for
the purpose of the Merger and has no assets other than the consideration to be
paid in connection with the Merger.
SECTION 8. Defined Terms. Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to such terms in the Merger Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective officers as of the day and year first above
written.
TELEBANC FINANCIAL CORPORATION
By: /s/ Mitchell H. Caplan
-----------------------------
Name: Mitchell H. Caplan
Title: Vice Chairman of the Board and President
TBK ACQUISITION CORP.
By: /s/ Mitchell H. Caplan
-----------------------------
Name: Mitchell H. Caplan
Title: Vice Chairman of the Board and President
DIRECT FINANCIAL CORPORATION
By: /s/ Michael D. Devlin
-----------------------------
Name: Michael D. Devlin
Title: President
3
<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
July 22, 1998
